China’s Reverse Marshall Plan
By Max Fraad Wolff and Richard Wolff
After World War II, the supreme economic position of the United States coupled with the disintegration of the wartime U.S.-USSR alliance into the Cold War produced a remarkable policy. The Marshall Plan provided financing, usually loans, so that Europe could pay for the imports required to rebuild war-destroyed economies. Loans enabled exports and thereby helped provide jobs to demobilized U.S. soldiers and workers laid off from wartime industry.
Wages paid and profits earned by U.S. enterprises able to export to Europe because the Marshall Plan provided part of the tax revenues that Washington used to finance the plan. The enhanced demand for goods and services reduced the risk of sliding back into depression. The recession that immediately followed the war and dark memories of the long, hard 1930s Depression years with high unemployment pushed policymakers: jobs had to be created and the masses employed to prevent political and economic disaster.
The Marshall Plan worked, becoming a crucial element in Europe’s postwar recovery while boosting employment, profitability and growth in the United States. Other byproducts of the Marshall Plan were the North Atlantic Treaty Organization and the progressive encirclement of Russia (and then China) by a global network of anti-communist alliances. Both Republican and Democratic administrations celebrated foreign-policy gains and benefited from employment and economic growth.
Similar policy choices were made in Asia, as outlined by National Security Council Document 48/1. Immediately after the foundation of the People’s Republic of China in autumn 1949, the U.S. articulated, in NSC 48/1, a policy of assisting the nations of East Asia to grow and challenge China.
U.S. policy in East Asia has been deeply influenced by the idea of fostering development and growth in East Asian states, except China, since this time—though U.S. China policy did become more nuanced after president Richard Nixon’s breakthrough 1972 diplomatic trip there. During the Cold War, development assistance, loans and favored trading arrangements flowed to non-communist states such as Japan, Taiwan and South Korea.
Of course, some observers complained then—and some still do today—about the repayment of debts and the rising competition faced by U.S. industry as U.S. allies emerged on to the global economic stage. However, the economic and political gains for the U.S. economy and foreign policy from the Marshall Plan and its East Asian counterpart have struck most observers as infinitely more important and positive than any unpaid debts.
Today, China operates a reverse Marshall Plan. To help sustain its massive exports to the United States, it recycles the resulting dollar inflow in the form of loans and asset purchases. Here, the developing nation lends to the developed: money flows in the reverse direction.
As of last December, Chinese net holdings of U.S. securities were U.S. $810 billion. Huge Chinese trade surpluses with the U.S. are turned into dollar holdings—lent back to consumers and the government to enable the continuation of trade and development. More than half of China’s 2005 $200-billion-plus trade surplus with the United States resulted from exports by U.S.-based multinational corporations (MNCs). Leading U.S. firms are interested in maintaining this relationship alongside Chinese business and state authorities. Massive rural to urban migration in China and pressure for employment opportunity is partially absorbed through this channel.
Inside China, industrialization and near or above double-digit GDP growth are greatly assisted by the massive inflows of foreign capital, technology and expertise. In sector after sector, production has moved to China from elsewhere, increasing employment, gross domestic product and political stability. The export revenues of China-based enterprises sustain the wage and profit incomes that generate tax revenues for the Chinese government to recycle into dollars. Chinese dollar loans to the U.S. maintain the dollar exchange rate necessary for the exports to continue.
Observers, inside and outside of China, have expressed concerns about accumulating debt, much as Marshall Plan critics once did. Many focus on China’s vulnerability from accumulating such a large amount of U.S. assets; others fret over the extent of U.S. asset sales. The U.S. may not be able to repay fully or in a timely fashion; or it may take actions to reduce the value of the debt that will be costly for China.
Such concerns miss a key point: they repeat the error of those concerned about the repayment of Marshall Plan debt. Whether or not liabilities are ever fully honored, China’s reverse Marshall Plan is central to the stunningly fast and broad-based industrialization of select areas of its economy. Increasingly modern industrial infrastructure and productive capacity are catapulting China to the front ranks of the world economy. That achievement is infinitely more important and positive than any unpaid debts that may emerge. U.S. MNCs have also benefited from falling production costs and new competitiveness, as recent levels of Fortune 500 profits make very clear.
The deepening dependence of U.S. enterprise profitability on the Chinese economy has only begun to yield its economic and political dividends for China, which will likely outshine the comparable dividends to the U.S. economy. Labor productivity numbers rise as imported components rise in quality and fall in price. Lower costs allow access to global markets populated by hundreds of millions of people with modest incomes. At the same time, firms producing inside the United States reap greater profits because they can pay their workers relatively lower wages, knowing that those workers can buy cheap goods imported from China—think Wal-Mart.
Thus it follows that the U.S. depends now on China’s reverse Marshall Plan much as Europe after the war depended on the original. The future will likely show the great historical importance of China’s reverse Marshall Plan.
Max Fraad Wolff is a doctoral candidate in economics at the University of Massachusetts, Amherst, and managing director of GlobalMacroScope. He co-wrote this work for www.GlobalMacroScope.com with Richard Wolff, also of GlobalMacroScope.
—Asia Times Online, March 8, 2006