U.S. MOVES TO ACKNOWLEDGE CHINA AS A MORE EQUAL PARTNER IN WORLD AFFAIRS

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BY GLENN SOMERVILLE

Analysis

WASHINGTON – The United States aims to draw China more fully into helping reshape the global economy by broadening bilateral economic talks to include diplomatic issues and so recognize Beijing as a more equal partner in world affairs.

Next week’s talks with China will bring the U.S. State Department in as a partner with the Treasury Department on Washington’s side for the first time since former Treasury Secretary Henry Paulson initiated regular talks in 2005.

By expanding the dialogue in this way, the Obama administration hopes to settle China’s wariness that Washington’s motive was to keep Beijing in its place, rather than to recognize the country’s rising might.

“I see the broadening … as a way to develop a new institution in which China has a direct and key role in framing and directing the debate,” said Michael Pettis, an associate with the Carnegie Endowment for International Peace, who also teaches at Peking University.

The Strategic Economic Dialogue has been symbolically renamed the Strategic and Economic Dialogue, to cover the gamut of issues from climate change and North Korea to trade and exchange rates.

A key American goal is to persuade Beijing that debt-strapped Americans will not be able to absorb China’s cheap exports as they did in the past.

Officials in Washington say both countries need to work to restore global economic balance and whittle away at a U.S. trade gap long considered unsustainable. China’s surpluses have irked U.S. lawmakers, who complain Beijing has relied on an undervalued yuan currency to the detriment of U.S. producers.

SOFTLY, SOFTLY

In his first trip to Beijing as chief U.S. economic spokesman last month, Treasury Secretary Timothy Geithner called for relations to be handled “with mutual respect for the values, traditions and interests” of both countries and with the recognition that each was obliged to help right the global economy.

Analysts said Geithner’s tone, softer than that of the blunt-talking Paulson, seemed more appropriate as the world tries to find common ground and dig out from a two-year-old financial crisis.

“Geithner isn’t taking the advice of those who were pushing for China to adopt practices like ours, to continually press China to allow more participation by foreign firms like Paulson advocated,” said Nicholas Lardy, a leading China expert at the Peterson Institute for International Economics in Washington.

“On the other hand, I don’t think anyone could make the argument with a straight face these days that they should try to have capital markets like ours,” Lardy added.

There is widespread agreement, though, that the two countries urgently need to get economic relations into better shape. China is now the single largest U.S. creditor, holding $768 billion or more of U.S. Treasury securities and Americans seem to be moving toward a permanent shift to more savings.

“We need to have a frank discussion with the Chinese and they need to prepare for a new U.S. economy and a new global economy,” a senior U.S. Treasury official told reporters on Thursday. He said the new reality was one in which the U.S. economy recovers slowly and consumers no longer spend freely.

REBALANCING COMING, LIKE IT OR NOT

“If the need for rebalancing — or more importantly, how the rebalancing will take place, since it will happen one way or the other — is not the central theme of the SED, then we will have missed an important opportunity,” Pettis said.

“Both U.S. and Chinese policy-makers seem to underestimate how difficult the transition is going to be for China, and how vulnerable China is to the speed with which the U.S. adjustment in net consumption takes place,” he said.

With Secretary of State Hillary Clinton as co-chair for the U.S. side with Geithner, the agenda stretches to topics like the U.S. bid to rein in North Korea’s nuclear ambitions and efforts to cope with climate change and promote technology for cleaner fuel use.

Neither is an easy issue to tackle, especially if cleaner technology means having to persuade China that it should be spending more on technology to clean up emissions as opposed to spending that would more directly support economic growth.

“China is committed to growth, growth and growth and, in that circumstance, anything that looks like caps on emissions, or whatever, is going to be seen as something boxing them in and as a luxury that they can’t afford,” said Dan Blumenthal, a resident scholar at the American Enterprise Institute in Washington.

Bringing the State Department into the talks was a positive step that the former Bush administration should have taken from the outset, Blumenthal said.

He warned, however, that China and the United States have fallen into an unhealthy economic dependency that will be exceptionally hard to correct.

“It’s like two drunks leaning on one another in a bar — we reinforce one another’s worst instincts because we continue to borrow from them and they keep expanding exports and lending money to us to buy them,” he said. “It’s extremely hard for either to stop.”

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