The fault lines in the U.S.-China
relationship have been increasingly exposed in recent weeks, with
rhetorical barbs exchanged on trade, the treatment of foreign
companies in China, strategic issues such as U.S. support of Taiwan and
Tibet’s Dalai Lama, responses to Iran’s nuclear ambitions and especially
exchange rates. Domestic consensus in the U.S. on the need for action with
regard to the renminbi
(RMB) is growing. Chinese leaders, including Premier Wen Jiabao, have recently
hit back at the U.S. for what they characterize as interference in China’s
security and economic affairs and U.S. economic mismanagement. Today’s note
draws from two recent pieces of RGE Analysis, “U.S.
China Tensions: Co-Dependency Pains” and “Who
Will Buy the Treasurys?” in which we examine the quest for the new normal
between the world’s largest creditor and debtor. Given the importance of the
relationship to global trade, growth and security, RGE believes that the two
countries will avoid a full-blown confrontation, but uncertain relations and
tit-for-tat trade policies could constrain global growth.
Finding the New Normal
The friction suddenly afflicting the world’s most watched bilateral
relationship stems from a struggle on the part of both China and the U.S. to
find the “new normal” wrought by the changing dynamics of global economic and
political power and influence since the financial crisis. To some extent, the
financial crisis exacerbated ongoing structural changes that elevated the role
of emerging markets in the global economy and increased their influence in
debates on financial
regulation, trade
and currency policy. China’s ample resources,
together with its ability to encourage its banks to lend and its state-owned
enterprises (SOEs) to spend, also allowed it to be opportunistic, adding
sharply to its resource
holdings and supporting cash-strapped countries and companies during the
recession. Yet its leverage on U.S. policy seems overstated, particularly as
China’s willingness to diversify away from U.S. assets remains constrained by
its desire for stable economy policy. Moreover, its economic apparatus is
stronger than its security position. In this environment, there is a risk that
one or the other player might overplay its hand or badly misinterpret the
intentions of the other.
In part this normalization reflects the fact that the pressure for bilateral
and multilateral cooperation, which helped stave off a near depression in 2009,
has diminished. Given the role of the U.S. and China in sparking—and ultimately
easing—the crisis, it was no surprise that bilateral tensions would be
suppressed during this period as both countries looked inward to support
growth. China, and to a lesser extent, some of the other emerging market
economies, have not yet fully embraced the economic and political multilateral
policy initiatives that will help mediate the changes and continuities of the
global economic order. By the same token, the existing institutions still do
not reflect some of these changes. The G20’s rise to prominence does provide a
potential venue for such negotiation, but it remains too large and diverse to
be efficient, and many different policy goals have been thrust onto its agenda.
Although political tensions appear to have heightened after December’s Copenhagen
climate change meeting, in part due to the American perception that China’s
behavior prevented a more ambitious agreement on carbon emissions from
taking shape, at least some of the recent friction seems designed to play to
their respective domestic constituencies. The U.S sells weapons to Taiwan;
China threatens sanctions on U.S. defense contractors; President Obama meets
with the Dalai Lama, and China cancels bilateral military parleys; meanwhile,
both cry foul with respect to the other’s economic policies in their legislative
meetings.
The lull in the cycle of diplomatic summits and visits since the Copenhagen
meeting has contributed to the falling out. But the diplomatic cycle picks up
again in April, with President Hu Jintao expected to attend an April summit on
nuclear proliferation in Washington, while U.S. officials prepare for the next
round of the U.S.-China Strategic
and Economic Dialogue (S&ED) scheduled for this summer in Beijing, as
well as upcoming G-20 meetings. Each side will probe for new sources of
leverage, and further chiding in public may be inevitable.
Still, the past several months have revealed some dangerous misperceptions.
Last year the Obama administration pushed for China’s cooperation on a global
climate change deal, but expectations that China would ever sign a binding emissions
deal that might slow its economic growth seemed optimistic at best.
Recently, China appears to have pressed U.S. diplomats to foreswear future
weapons sales to Taiwan in return for cooperation on Iran, a position the
administration could not legally take. RGE does not think either side will
seriously overplay its hand in 2010, but the risk is that, in areas where
contact is infrequent and superficial, like military-to-military ties, one side
may adopt policies or postures which inadvertently provokes the other. The
first year of the Obama administration saw diplomatic exchanges increase across
the board, with rather dramatic results on some under-the-radar issues like
clean tech. While each side has taken the recent lull in diplomatic exchanges
to recalibrate, the resumption of these exchanges may struggle under the burden
of recent tensions. Meanwhile, other U.S. allies, ranging from Australia to the
Europeans, seem to be calling on the U.S. to retain its firm position with
China, a message that may pervade President Obama’s Asia trip next week.
The tit-for-tat trade
tensions seem fated to continue simmering into 2011, given subdued global trade
growth, but RGE regards it unlikely the U.S. will to declare its second-largest
trading partner a currency manipulator, which would set in motion an economic
and political response. China will drag its feet on Iranian sanctions, but
ultimately it is not in a position to block any deal on Iran’s nuclear program
if Russia is really on board. Yet in the medium-term the coincident political
cycle in the U.S., China and Taiwan could prove dangerous, with each country
holding presidential elections (or a Communist Party succession in China’s
case) in 2012.
All rights reserved, Roubini
Global Economics, LLC. Opinions expressed on RGE EconoMonitors are those of
individual analysts and may or may not express RGE’s own consensus view. RGE is
not a certified investment advisory service and aims to create an intellectual
framework for informed financial decisions by its clients. This content is for informational purposes only and
does not constitute, and may not be relied on as, investment advice or a
recommendation of any investment or trading strategy. This information is
intended for sophisticated professional investors who will exercise their own
judgment and will independently evaluate factors bearing on the suitability of
any investment or trading strategy. Information and views, including any
changes or updates, may be made available first to certain RGE clients and
others at RGE’s discretion. Roubini Global Economics, LLC is not an investment
adviser.