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Their Economies at Stake, U.S., China Must Overcome Current Friction

By Ian Bremmer

Many within the U.S. and Chinese governments recognize that the two economies have become increasingly interdependent. That's why both sides have committed considerable domestic political capital to a "strategic economic dialogue," twice-a-year senior-level negotiations meant to coordinate policy and to forge compromise on the issues that generate more and more friction between them. If this high-profile dialogue fails completely, the consequences for the U.S. and Chinese economies could be considerable. What's required is strong farsighted leadership from both sides.

On the one hand, business between the two countries is booming. Between 2000 and 2006, bilateral trade flows grew from about $116 billion to some $343 billion. China needs American consumers to continue to spend freely, because about one-fifth of China's exports are now headed for the United States. Americans profit from access to inexpensive products and draw about 15 percent of their imports from China. Many American investors and companies operating in China are profiting handsomely. Annual U.S. foreign direct investment in the country has hovered at around $3 billion in recent years.

The growing interdependence of the two economies takes other forms as well. As we're often reminded, China owns a lot of U.S. debt. As of January 2007, the Chinese government held about $353.6 billion in U.S. Treasury securities and probably controls hundreds of billions of dollars in other types of U.S. debt and dollar-denominated assets. Add all these trade, investment and debt numbers together and a bad day in one country's economy is a bad day in the other's.

But a variety of political problems have generated friction in the relationship. Some in the United States charge that low-cost manufacturing in China kills American jobs and that state manipulation of China's currency aggravates a growing bilateral trade deficit that pushed past $230 billion last year. The leaders of some U.S. companies doing business in China insist that Beijing has proven unwilling to enforce intellectual property rights protections and demand that the U.S. Congress do something about it. U.S. lawmakers have responded with threats of protectionist legislation that targets Chinese imports.

China has played a key role in making itself a political punching bag. Just as the release of new trade deficit figures this summer added pressure on Congress to act, a growing number of defective Chinese-made products have raised public safety concerns across the United States. In June, a U.S. government agency ordered the recall of about 450,000 tires imported from China over concerns they might shred during highway driving. Every toy that the U.S. Consumer Product Safety Commission has recalled this year was made in China.

For U.S. lawmakers already all-to-eager eager to score political points at China's expense, the news that American children are playing with Chinese-manufactured toys covered in lead-based paint and that imported Chinese tires may come apart on the highway makes their work much easier.

The product safety issue reveals how U.S.-Chinese tensions could escalate. In July, Beijing responded to the controversy by halting the importation of a variety of chicken and pork products from America, citing chemical and bacterial contamination. The move signals Washington that attacks and restrictions on Chinese goods will carry economic consequences for U.S. producers.

Complicating the issue, the Chinese leadership is distracted at the moment from negotiations with Washington by the most sweeping internal personnel shuffle in more than a decade. With the approach of the five-yearly Party Congress in October, senior officials are now busy negotiating the fates of thousands of central government and party officials. This process encourages caution on all aspects of foreign and economic policy, as officials avoid taking risks so soon before their futures are determined.

The result of all this is a considerable test of leadership for both sides.

There's a lot at stake -- for U.S. companies and consumers and for China's continued growth. To reach mutually profitable compromise, U.S. policymakers should resist protectionist temptations to wage a war on Chinese products that can only produce a political backlash in China -- and to block Chinese investment in America, as they did when a Chinese oil company's bid to acquire the American firm Unocal fell victim to political posturing two years ago.

For China's leaders, the challenge will be in overcoming the resistance of entrenched domestic interests in helping to create a more level playing field for U.S. firms competing with Chinese competitors for Chinese markets and in reining in local-level Chinese manufacturers that ignore safety concerns and international law in their pursuit of easy profits.

Clearly, these things won't happen overnight, and domestic political pressures within both countries won't simply vanish. But if the two sides fail to reach common ground on these issues, both economies will suffer. A first test of their leadership will come in making plain to the other where investment is welcome and where it is not. Much of the failure on both sides flows from their unwillingness to define these boundaries in a clear way. Leadership requires that each side acknowledge political realities while seeking out new opportunities for mutually profitable collaboration and coordination.

The greatest roadblock for China will be in better understanding the American political system. Too often, the Chinese leadership believes that a deal struck with the executive branch of the U.S. government needs little Chinese help to meet the obstacles provided by an independent (and increasingly protectionist) U.S. Congress.

The greatest roadblock for America will come when leaders seeking re-election in communities that are hemorrhaging manufacturing jobs face the temptation to show voters they're willing to "get tough" with China.

The leadership test is in acknowledging that the two countries share a world of "mutually assured economic destruction," one which creates opportunities for those prepared to negotiate honestly and substantial long-term risks for those who aren't.

Ian Bremmer is president of Eurasia Group, a political-risk consultancy and the author of "The J Curve: A New Way to Understand Why Nations Rise and Fall,". He can be reached via e-mail at research@eurasiagroup.net.

(c) Tribune Media Services, Inc.


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