January 17, 2011 7:54 pm

China and US add up to positive sum

A vital relationship but only one part of the global puzzle

Before arriving on his state visit to the US on Tuesday, Chinese president Hu Jintao called for an end to the two countries’ “zero-sum cold war mentality”. Mr Hu is right that China’s rise can be, and ought to be, of benefit to all countries. It could also be badly mismanaged. Ensuring that it is not – impossible without a constructive US-China relationship – is today’s great challenge for international diplomacy.

The economic side of the relationship has been marred by friction. The US complains about China’s huge overall and bilateral trade surpluses, exchange rate peg, vast foreign currency reserves and violations of intellectual property rights. China complains about incompetent US financial regulation, vast fiscal deficits and the Federal Reserve’s quantitative easing. Yet the meeting may not be as inauspicious as it seems.

With China increasingly worried about inflation, the case for sustained nominal appreciation looks more attractive to Beijing. Domestic pressure for low inflation is even more potent than that for exports. This may explain why the renminbi has appreciated by more than 3.5 per cent against the dollar in recent months. Adding in wage rises, a substantial real appreciation may be under way.

China’s current account surplus has already shrunk from close to 11 per cent of output in 2007 to about 5 per cent. This is still huge. But from the US point of view, the movement is in the right direction. Beijing has realised that rebalancing towards domestic demand and particularly domestic consumption is in China’s interests. With foreign currency reserves already above $2,800bn, the case against accumulating still more must seem overwhelming.

The focus can therefore move to classic trade policy questions, such as protection of intellectual property. Fortunately, as China develops, improving such protection is also clearly in the country’s own interest. And with economic friction becoming just a bit more manageable, attention can and should move to broader strategic issues.

If a meeting of minds is emerging on economic policy, the gap between attitudes on security is widening. The visit to Beijing by US defence secretary Robert Gates last week did not calm nerves at the Pentagon. A surprise test flight of the People’s Liberation Army’s stealth fighter plane was disturbing both for its provocative timing and for demonstrating that China’s military technology is developing faster than the US had expected.

The test flight was the latest display of Chinese brashness in security matters. Beijing has twice suspended ties between the two countries’ armed forces after routine US arms sales to Taiwan. Tensions are simmering in the South China Sea, where China makes disputed sovereignty claims and objects to US reconnaissance. Beijing reacted with hostility when Japan’s coast guard detained the captain of a Chinese fishing boat that collided with it. And Beijing is abdicating its responsibility to rein in the rabid North Korean regime that is its client.

Whether this reflects a deep strategic shift or just a test of what China can get away with will depend on which of the competing ideologies and interests within the Chinese elite gains the upper hand. But in the long term, two things are clear. First, US military influence in the region will shrink and that of China will rise. This is inevitable. Yet the shift can happen in many ways. A responsible China can alleviate the strain on US resources, for example in securing safe shipping lanes. In contrast, an aggressive new superpower could easily trigger military escalation by neighbours who perceive US security guarantees as insufficient against a rising threat. The choice of which future it will be is largely Beijing’s. But Washington is not without influence on China’s desire to be a bully.

Second, both China and the US must see that their joint well-being depends on more than their bilateral relationship. Their roles in the Asia-Pacific area must be managed in concert with other regional powers. Japan is not the only one to worry about China’s intentions. Beijing has been busy constructing ports from Sri Lanka to Pakistan in what some label a “string of pearls” aimed at securing strategic strongholds. This has left India feeling encircled.

The insufficiency of the “G2” is not limited to regional security. The US is affected by China’s support for rogue regimes such as Sudan and its climate change policy. China, in turn, is affected by US-European deals on financial reform. The China-US relationship is only one piece of the puzzle confronting the world’s policymakers – but a crucial one to put in place.

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