Mon, Dec 08, 2008 page8

• Obama faces China’s challenge

  • By Sushil Seth
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  There is palpable anxiety in Beijing about the direction of US-China relations under US president-elect Barack Obama. It was apparent in Chinese President Hu Jintao’s (胡錦濤) remarks at the APEC conference in Lima, Peru. He said that he was hoping Obama would recognize the importance of US-China ties, while treading carefully on the thorny issue of Taiwan.

  From Beijing’s viewpoint, US President George W. Bush’s administration created conditions for China to loom large on the international stage.With the spy plane incident and Bush’s tough remarks on the US commitment to defend Taiwan with whatever it takes, however, its start was a bit rocky.

  But it didn’t take long for the bilateral relationship to recover. Indeed, the US’ China policy became a hostage, more or less, to a few key issues. The most important, of course, was the global war on terror, where China’s broad support was greatly welcome.

  The second issue was North Korea’s nuclear proliferation, where Beijing-sponsored six-party talks became the venue for any worthwhile progress.

  The third issue has been Iran’s nuclear ambitions, where Beijing hasn’t been as supportive, but has been willing to go along, short of confronting Iran.

  The upshot of it all is that with the US mired in the Middle East, and the North Korean imbroglio far from resolved, China never had it so good in promoting and projecting its image of international respectability.

  As the Bush administration is nearing its end, the US is now plunged into an economic crisis that could be the worst since the 1930s depression.

  Obama has said the US is facing “an economic crisis of historic proportions.” He will now have the difficult task of restoring both the US’ international image and bailing out its ailing economy.

  In some ways these are related problems. For instance, the US military operations in Iraq and Afghanistan have been increasingly contributing to the US budget deficit. Some estimates put the US war-related expenditures between US$2 trillion and US$3 trillion.

  Therefore, any winding down of US military operations in Iraq and Afghanistan (the latter might prove more intractable) would not only have a beneficial effect on the US economy, but also give Washington more flexibility to deal with challenges to its international supremacy — like the one from China’s enhanced position.

  One important area of discord between Washington and Beijing is likely to be the US’ ballooning trade deficit with China. China’s foreign currency reserves, largely from trade surpluses with the US, are now approaching US$2 trillion. Much of it is invested in US Treasury bonds.

  With the Democratic Party controlling the presidency and the Congress, and the US in deep economic crisis, the demand within the country for a significant correction of its unsustainable trade deficit with China is likely to become louder and shriller.

  It will take two forms. First, protectionist sentiment in the US will rise, with China accused of indulging in unfair trade practices.

  Second, China will be under greater US pressure to revalue its currency. China’s currency is under-valued to make its exports cheaper, flooding the US market.

  As James Fallows wrote in The Atlantic, “Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus … that the Chinese government has mostly parked in the U.S. Treasury notes.”

  In other words, it is the Chinese foreign reserves parked in the US Treasury bonds that have, in a large way, financed the never-ending appetite of US consumers to keep buying. With borrowed Chinese money and cheap goods from China, US consumers seemed as addicted to more of everything as Chinese were to opium foisted on them by British colonialists in the 19th century.

  Could this be a Chinese payback, wittingly or unwittingly, for the indignities they suffered in the colonial period?

  Surely, at some point, the US will wake up and realize how vulnerable they are to Chinese credit and cheap Chinese goods and the current economic crisis is likely to become the catalyst for an overhaul of US-China relations not long after Obama takes office.

  In the economic area, it will increasingly be reflected in seeking balanced trade with China. That is not going to be easy and it will lead to tensions.

  There is a view that China can further destabilize the US economy by diverting some of its reserves in the US Treasury bonds to other currencies, such as the euro. It seems unlikely though, considering that the European economies (and Japan) are as much in economic crisis as the US. In that sense, there is no real safe haven for the Chinese reserves parked in the US or elsewhere. As of now, the US dollar seems a better bet.

  Besides, China’s economy is heavily dependent on exports to the US. If China were to withdraw its currency reserves from the US, thus eroding its credit line, it would mean a significant decline in US imports from China. This would seriously damage China’s economic growth.

  At the same time, any precipitate withdrawal of Chinese currency reserves would depreciate US dollar, damaging China’s returns on its US investments.

  There is an argument that China can stimulate its domestic economy with all the savings and reserves it has at its disposal. That might be true to a point. But to turn around an economy geared to large-scale exports is not as easy as it might seem. Starting from a low per capita income (with the country’s 800 million rural masses with even lower incomes than their urban cousins), any stimulation of the domestic economy hoping to make an appreciable difference in the short, or even medium, term, will be a difficult task.

  By most estimates, China needs to keep growing at 8 percent or more to create employment opportunities for its people. There are fears already that the growth rate is likely to be below 8 percent, further deepening social unrest.

  What that means in terms of US-China relations is that Beijing is not in a commanding position economically to dictate the tone and direction of their bilateral relationship. The US is still the world’s largest economy, even with all its problems.

  And politically, if the incoming Obama administration manages to wind down its military commitments in the Middle East, the US should be able to reassert its global leadership.

  Indeed, China has suddenly found itself catapulted into a competing position not because of its inherent strength, but because the US is mired in Iraq and Afghanistan.

  It doesn’t mean that China wouldn’t like to be the global leader. But it needs to follow late Chinese leader Deng Xiaoping’s (鄧小平) advice for it to consolidate its position over a period of time.

  As Deng said, China should “observe developments soberly, maintain our position, meet challenges calmly, hide our capacities and bide our time.”

  Regardless, Obama will need to face the challenge before it is too late.

  Sushil Seth is a writer based in Australia.
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