Pettis acknowledges such a far-reaching agreement "will never be allowed to happen", and he's essentially right; the left has always envisaged this sweeping kind of international planning and cooperation as only possible between socialist governments. But it can't be ruled out that if the crisis continues to deepen, the US might be forced of necessity and despite the current economic offensive against China to invite more Chinese FDI on an ad hoc basis. The process already appears to be underway in California and other cash-strapped states (http://www.reuters.com/article/idUSTRE68C0TY20100913).
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http://mpettis.com/2010/10/xin-fa’an-a-modest-proposal-to-resolve-the-coming-trade-war/
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China has to choose between an unhealthy overreliance on the trade surplus and an even unhealthier over-reliance on investment, as I mentioned in a commenting on Bloomberg yesterday...And the US cannot tolerate a rapid increase in its deficits...Surpluses and deficits, after all, must balance to zero.
...one way to get this balance (here comes my modest proposal) would be for China to engineer a New Deal in America, which we could call Xin Fa’an (“new deal” in Chinese). As I have discussed many times... Beijing needs the US to continue running a rising trade deficit in order to absorb Chinese overcapacity while China slowly rebalances its economy towards domestic demand, which will take many years.
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Let China engage in a massive rebuilding of US infrastructure – it can build airports, highways, dams, and railways – which would raise investment levels enough keep the US trade deficit high in a way that benefits the US and China.
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As long as it earns more than it earns on its USG bond holdings, it will be better off economically even without considering the immense advantage of keeping the US trade deficit high for the eight to ten years China is going to need to rebalance its economy away from its toxic over-reliance for growth on the trade surplus and economically non-viable investment…
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The US can sharply improve its infrastructure in a rational way without a boatload of Congressmen arguing over who gets what. It can raise employment without raising the fiscal deficit. And as icing on the very large cake we can avert the trade war that is an almost inevitable outcome of the current imbalances.
So can we get China to fund the Xin Fa’an in America? Probably not. Muddled Chinese public opinion will be furious that desperately poor China is investing in rich America, even though the overall returns will be better and the cost of China’s adjustment will be much lower. Muddled American opinion will be furious that America is “selling out” to China. Bumptious politicians in both countries will completely fail to get the underlying economics of the trade, and they will never allow it to happen. But it is still a pretty good idea.