Dialogue Brings Inextricably LinkedEconomic Giants Back to the Table

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If U.S.-China relations seemed to be on the backburner during the George W. Bush presidency, the upcoming U.S.-China Strategic and Economic Dialogue in Washington later this month signifies a reinvigorated approach, though it remains to be seen how friendly or constructive this dialogue will be, especially in light of strained economic relations in recent years.

The initiative expands on the Strategic Economic Dialogue that President Bush and Chinese President Hu Jintao established in 2006 as a Cabinet-level forum on shared long-term objectives and short-term challenges in the nations’ economic relationship. And although economic issues are still at the heart of the dialogue, Presidents Barack Obama and Hu this year upgraded the two nations’ bi-annual meetings to include strategy, or foreign policy, not necessarily directly related to economic concerns.

The high-level meetings in late July — coming on the heels of massive economic stimulus programs implemented by both countries — will feature U.S. Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner and their Chinese counterparts, Vice Premier Wang Qishan and State Councilor Dai Bingguo. Clinton and Bingguo will chair the “strategic” or foreign policy part of the discussion while Geithner and Qishan will lead the economic talks.

Dennis Wilder, a visiting fellow at the Brookings Institution’s John L. Thornton China Center, recently wrote that the Bush administration deserves some credit for putting economic relations with China on the map, despite complaints that China largely slipped off America’s diplomatic radar after 9/11 and the Iraq war. Wilder asserts that under the guidance of former Treasury Secretary Henry Paulson and former Deputy Secretary of State Robert Zoellick and their Chinese counterparts, the Strategic Economic Dialogue (SED) in 2006 and 2008 refocused the two nations on their mutual interests.

“At a moment when it looked as if the United States Congress might act to punish China for its ballooning trade surpluses with the United States by enacting high tariffs on Chinese imports unless China adjusted its currency peg to the U.S. dollar, [the SED] helped to ease the congressional concern and, indeed, from the first meeting of the SED in Beijing in December 2006 until the last round in December 2008, the SED accomplished one of its major goals as China’s currency appreciated by an impressive 20 percent against the U.S. dollar,” Wilder wrote. “Congress did not enact punitive legislation and a trade war was avoided,” he added.

And those meetings yielded results on the diplomatic front as well. Zoellick and his successor at State, John Negroponte, convinced State Councilor Bingguo to help stem the tide of Chinese arms flowing into Iran and terrorists in Iraq. They also broached the touchy subjects of human rights abuses in Darfur, Burma (Myanmar) and Zimbabwe. Conversely, China used the opportunity to air its concerns over what it viewed as the egregious actions of the Taiwan government.

“We have again shown that direct engagement is a pathway to success, that through engagement the United States and China can build a stronger relationship that benefits our citizens and the global economy,” Paulson said at the end of that meeting.

So what’s at stake for the upcoming dialogue? Wilder, writing on the Brookings Institution’s Web site, said the inclusion of Clinton in the discussion signals that the United States is taking the dialogue more seriously.

“This is no small thing as the secretary of state’s time and energy is typically only engaged on those matters of foreign policy of highest priority to the president and the nation,” Wilder wrote. “Administration officials also point out that Secretary Clinton has elevated the issue of climate change and clean energy to a top priority in the new talks because she believes this is one of the most important issues where the United States and China need to intensify the global dialogue.”

Clinton has also voiced optimism for the bilateral talks. “Through the two days of meetings, we look forward to in-depth discussions with our Chinese counterparts to enhance the welfare of the citizens of both countries,” Clinton and Geithner said in a joint statement in late June.

In a statement in May, Chinese President Hu lauded the upcoming meetings as “an important platform for both nations to deepen understanding, mutual trust and cooperation.”

But the diplomatic niceties belie the strange love-hate economic partnership that has developed between the two powers — one that, despite constant friction, remains indispensable to both sides and to the world economy.

The Obama administration has been trying to reassure the Chinese that the United States is tightening up financial regulations and aiming to get its estimated class="import-text">2009July.U.S.-China.txt.8 trillion budget deficit under control. In recent months, Chinese officials have been unusually vocal in expressing their worry about the safety of China’s assets in the United States.

The People’s Bank of China has even suggested that the world think about relying on a new currency reserve system to replace the dollar — a proposal many experts dismiss as unlikely and one that Beijing recently downplayed as well. At the same time though, when Treasury Secretary Geithner spoke at Peking University in Beijing in early June to reassure the Chinese that their investments were safe, the audience responded with laughter.

Yet the economic interdependence between China and the United States is hardly a laughing matter. As of spring, the fluctuating U.S. trade deficit with China stood at about .8 billion. China also holds approximately 0 billion in U.S. Treasury bonds — with critics in China arguing that further depreciation of the U.S. dollar could jeopardize this investment, while others claim it is a safe haven given the propensity of the U.S. economy to recover.

But these inequities are a double-edged sword for both economic giants. If China stops buying Treasuries, borrowers in the United States will likely feel the pinch as costs rise. At the same time, buying less Treasuries would mean allowing the Chinese currency, the yuan — which many accuse Beijing of keeping artificially low — to rise against the dollar, an unsavory prospect given that it would hurt China’s exporters.

Likewise, if the U.S. government borrows less — keeping interest rates low and preserving the value of China’s existing bond holdings — that reduced government spending could also translate into a reduced American appetite for Chinese goods.

And that could spell disaster for the Chinese economy, which unlike the U.S. economy, relies heavily on exports rather than domestic consumption. According to the World Bank, American exports constitute 11 percent of gross domestic product, while China’s make up 42 percent of GDP.

Moreover, even with Obama’s pledge to curb reckless American spending, the United States will remain the world’s most powerful consumer market for the foreseeable future, which in turn means it will rely on — and be relied upon by — export-driven China.

So as long as China holds U.S. assets and government-backed debt, it has a vested interest in seeing the American economy recover. Likewise, the world has a vested interest in maintaining this engine of economic activity in the face of a global financial crisis — a point Geithner, in particular, has stressed.

“China and the United States individually and together are so important in the global economy and financial system that what we do has a direct impact on the stability and strength of the international economic system,” Geithner, who is fluent in Mandarin, said in his June speech at Peking University.

And the big question on everyone’s minds is whether that international economic system is beginning to recover. Timothy Adams, managing director of the Lindsey Group and former undersecretary of treasury for international affairs, told reporters in June that his most recent visit to China revealed a newfound optimism about the economy.

“Last fall there was a sense of fear and astonishment at the speed with which this financial and economic crisis have evolved through the Chinese economy,” he said on a conference call held by the Atlantic Council. “Officials were going back on their heels.”

But Adams said China’s economy — like America’s — is in the midst of a “modest recovery.” That optimism, of course, could affect discussions in Washington later this month. “There was a real sense of buoyancy, cautious buoyancy, swagger, a cautious swagger, but a swagger nonetheless, as there is obviously a recovery in place,” Adams said.

As China’s global influence escalates and becomes inextricably linked to the United States, the dialogue becomes increasingly important, Wilder argues. He said massive stimulus packages adopted by the United States and China have helped to stem the economic freefall, but they are only a temporary bandage.

“They do not, for example, address the systemic issues that have created the large annual bilateral trade imbalances between the United States and China, which have at their root cause the American propensity to high personal consumption and the Chinese propensity to high personal savings,” Wilder explained.

“The dialogue provides American and Chinese policymakers a top-level forum in which to consult closely on their longer-range macroeconomic policies and plans so as not to surprise each other and hopefully design mutually reinforcing policies that raise all boats in the world economy.”

About the Author

Michael Coleman is a contributing writer for The Washington Diplomat.

Last Edited on July 7, 2014