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Wednesday, Jan. 19, 2011

Hu's momentous U.S. visit


Special to The Japan Times

HONG KONG — The pomp and circumstance marking President Hu Jintao's arrival in Washington could define a dangerous moment in relations between the United States and China. Political hype and pressures could easily poison the atmosphere and prevent progress on the proliferation of business, economic and financial issues dividing the two countries, not to mention perilous questions like the nuclear threat from North Korea, nuclear proliferation generally and China's military buildup.

Former U.S. Secretary of State Henry Kissinger's warned in an opinion article in both the New York Times and the Washington Post of the danger of a new "cold war" mentality. The fallout would be damage to both countries and to global security and economic well-being.

The timing is not auspicious. President Barack Obama suffered a humiliating rebuff in the November congressional elections and Republican opponents are baying for his blood, seeking his ousting next year as their main agenda. It would be easy for Hu to perceive Obama as just as weak and vulnerable politically as the U.S. is economically sclerotic, and to block progress except for mealy-mouthed words of friendship in the communique.

Hu is due to hand over next year to China's next generation of leaders: Above all, he must not be seen to be weak in dealing with American demands, and he wants to ensure that his legacy lives on and that he has a continuing power base after he has stepped down.

On top of this, America's economic problems are becoming glaringly obvious. Last week, senior executives of the two major rating agencies warned within hours of each other of possible loss of America's much-vaunted triple A credit rating. The U.S. Treasury announced that total U.S. debts have topped $14 trillion, which puts them dangerously close to the figure for U.S. gross national product, about $14.4 trillion. Hu's arrival in the U.S. is as much feared as feted because China has become the world's biggest exporter, sitting on a massive pile of $3 trillion in foreign exchange reserves, much of which goes to prop up indebted America.

Barry Ritholtz commented acidly in The Big Picture blog: "It seems that every eejit with a fundamental misunderstanding of mathematics" has been pedaling the idea that China is funding U.S. deficit spending. This is only 7.5 percent true, since that was the share of China in the $13.6 trillion debts outstanding in September.

Japan holds an additional 6.4 percent; but the bulk of U.S. government debt is held by U.S. individuals and institutions. Nevertheless, Washington has to worry: The marginal money will set the price.

There are 101 points of disagreement between the U.S. and China on business, economic and financial matters. The most obvious and acrimonious arguments have been whether China is deliberately keeping the renminbi undervalued to boost its exports and economic growth. Washington also complains about China's trade and investment barriers and failure to protect intellectual property rights. Beijing grumbles about U.S. barriers against exports of high-tech goods and Washington's refusal to grant it market-economy status.

New issues keep flaring up. Washington claims that China's new massive investments in solar and wind power and other renewable energy sources subsidize production costs and infringe World Trade Organization guidelines. Western countries have protested against China's alleged cyber-sabotage; its forcing companies to transfer high technology to their Chinese partners; its alleged control of rare earth exports to damage Japanese and U.S. high-tech companies; and its alleged industrial espionage.

Leading U.S. officials have recently turned down their rhetoric, but remain focused on outstanding issues. Treasury Secretary Timothy Geithner last week called for a fresh start in the U.S.-China relationship, claiming that "We have a great deal invested in each other's success."

He maintained his criticism of Beijing's policy on the currency, urged China to put new emphasis on domestic consumption rather than on exports and complained about theft of intellectual property, but put these in a positive context that Beijing's existing policies were unsustainable without long-term damage to China as well as to the world economy. He also pointed out that China was not to blame for America's own economic shortcomings, notably its failing education system, faltering public infrastructure and lack of investment in research and development.

On the Chinese side, passions are high. The abiding worry of Chinese officials is that America will do anything to block the rise of China. As Kissinger noted, for centuries China had an ingrained "Middle Kingdom" view of Chinese superiority, with other countries regarded as vassal states that should pay tribute. Western — and Japanese — humiliation of China in the 19th and 20th centuries has neither been forgotten nor forgiven.

China views U.S. demands for renminbi revaluation as counterproductive and an effort to infringe its sovereignty, though last week China again ratcheted the currency upward slightly. Beijing is listening but does not want to be seen to give in to bullying, and is only thinking of gains of 5 to 6 percent a year, far below where Washington thinks the currency should be.

With China's growth continuing at close to double digits, it has seen its economic muscle grow and grow. When Bill Clinton became U.S. president, China's economy was about 7 percent of the size of the U.S. By 2001 when George W. Bush took over, it was 13 percent. When Barack Obama entered the White House, China had grown to 30 percent, and today it is about 40 percent of the size of the U.S. economy. Beijing officials are conscious of their growing strength, and last week Chinese economists warned that if Japan were tempted to join a trans-Pacific trade partnership along with the U.S., China would rethink its multilateral trade strategy in Asia.

Given the strained relationship, a gloomy U.S. official said that Obama and Hu had the impossible task of "trying to put the toothpaste back in the tube." The two leaders have to do more than sign a vaguely friendly declaration. One problem is that a G-2 relationship between China and the U.S., even if it could be achieved, would not be sufficient for solving the pressing economic issues confronting the world, which need cooperation from Europe, India and Japan and contributions from rapidly growing emerging economies. Pity that the G20 is such a wishy-washy body.

At the same time concentrating on any single contentious issue, of which there are so many, could lead to neglect of the others or — worse — failure to reach agreement on that issue. However, North Korea stands out as the issue where Obama and Hu owe it to all our futures to make some real progress.

If Obama and Hu are to set the Sino-U.S. relationship on a new track, they need to make strong commitments to seek solutions for their bilateral disagreements that will promote greater global growth and harmony. And they have to do something about their body language to convince other leaders and themselves that they mean it. It will not be easy: Obama has a natural arrogance and Hu an aloofness that borders on a communist apparatchik's disdain for those who do not share his views.

Kevin Rafferty is a veteran journalist.


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