June 6 (Bloomberg) -- When President Barack Obama made his first trip to China in November 2009, he was burdened by the highest U.S. jobless rate in 26 years, a shrinking economy and the biggest federal budget deficit in U.S. history.
Now, the U.S. economy is rebounding and it’s Chinese President Xi Jinping who’s likely to be preoccupied with domestic concerns as he prepares to meet with the U.S. president in California. That may give Obama a stronger hand in reshaping relations with his nation’s chief economic partner and rival.
During the U.S. recession, many in Asia saw the U.S. as being in “almost plummeting decline,” says Kurt Campbell, who was the State Department’s top Asia policy official until February. Today, in China, “there is a deep recognition of the challenges they face going forward and there is a better appreciation of the staying power and capability of the U.S.”
The countries’ shifting economic fortunes are “one of the most important aspects of the relationship,” Campbell said. That, he said, could help Obama forge the personal ties with China’s new leader that eluded him with Xi’s predecessor, Hu Jintao, who rarely deviated from scripted remarks and tightly choreographed meetings.
Such chemistry could pave the way for Obama to get Xi’s aid in reining in North Korean nuclear ambitions and for joint efforts to curb cyber-spying that’s siphoning trade secrets from U.S. companies and classified weapons designs from the Pentagon. The two men will meet tomorrow and Saturday at a desert estate in Rancho Mirage, California.
For Obama, a stronger U.S. economy also means “less of a sense of urgency” going into the talks, said Jeffrey Bader, who was the president’s China adviser on the National Security Council during the first term. “There isn’t that feeling of ‘I’ve got to get results on economic issues.’ It takes some of the pressure off.”
The U.S. is growing faster than both Japan and the euro area. The economy, now in its 16th consecutive quarter of growth, is about $500 billion larger than a year ago, the jobless rate is dropping, and the budget deficit so far this year is one-third smaller than over the same period in 2012.
Xi, meanwhile, has responded to China’s slowest growth in 13 years by calling for deeper -- and politically difficult -- market-oriented moves. The International Monetary Fund highlighted the need for action on May 28, saying the “margins of safety are narrowing” for a Chinese economy that has become overly dependent upon credit-fueled investment.
“The current growth model needs to change,” said the IMF, stressing the need for policies that may slow the economy in the short run while putting it on a more sustainable long-term path.
Obama’s approach to China has evolved since he charged during the 2008 presidential campaign that then-U.S. President George W. Bush was a “patsy” in bilateral trade negotiations.
During his 2009 visit to Beijing, Obama was assailed by critics, from consumer activist Ralph Nader on the left to former Alaska Governor Sarah Palin on the right, for allegedly deferring to the Chinese. In the months before the talks, the president had delayed meeting with the Dalai Lama, the spiritual leader of Tibet. He then appeared alongside President Hu at a no-questions-allowed press conference more familiar to an authoritarian system than the world’s leading democracy.
“The White House was not happy with the way the initial trip was portrayed,” said Timothy Adams, who headed the Treasury Department’s international portfolio under the Bush administration. “They didn’t want that image. After that, there was a much more measured approach to China.”
To be sure, many Chinese still see the U.S. as a declining power that will inevitably be eclipsed as China regains its historical dominance. The U.S. has piled on government debt in recent years, driving its outstanding borrowing to more than $16 trillion. China’s holdings of Treasury securities have grown to $1.2 trillion from $929 billion at the time of Obama’s trip.
And while China’s 7.7 percent growth rate is down from almost 10 percent two years ago, it remains the envy of much of the world.
Still, investors betting on the U.S. stock market at the conclusion of that summit would have gained 45 percent since then while the Shanghai stock index lost roughly 31 percent.
Architects of Obama’s China policy, such as Campbell and Bader, say the administration has consistently emphasized the growing importance of Asia and China’s role in particular. In 2011, as Obama wound down wars in Iraq and Afghanistan, he placed greater stress on relations with Asia, a diplomatic maneuver Secretary of State Hillary Clinton branded a “pivot.”
National Security Adviser Tom Donilon promoted the intensified U.S. focus on Asia, calling it a “signature achievement” of the administration in a March 11 speech to the Asia Society in New York. Donilon, who will leave his post in early July, said Asia already accounts for more than a quarter of global economic output and will in the next five years witness almost half the economic growth outside of the U.S.
“The future of the United States has never been more closely linked to the economic, strategic and political order emerging in the Asia-Pacific,” he said in the speech.
In Beijing, the increasing U.S. attention to the region is seen as an effort to contain China’s rise. In recent years, as the two sides sparred over human rights, cyber-spying and rival territorial claims to the South China Sea, the relationship became infected with what scholars at the Brookings Institution in Washington called “strategic distrust.”
Now, both sides are trying to nurture leader-to-leader ties. After seeing Xi during a 2012 visit to the U.S. while he was China’s vice president, some former administration officials say the new leader has the personal touch his predecessors lacked.
“In all the meetings I was in, President Hu was not a guy who was going to veer off his talking points,” says David Loevinger, who retired last year as the Treasury Department’s coordinator for China affairs. “Xi seems a bit more like someone who will engage.”
Issues that once dominated the bilateral relationship, such as U.S. objections to Chinese currency and trade policies, have faded. The renminbi has risen against the dollar about 10 percent since November 2009, quieting U.S. manufacturers’ complaints about unfair Chinese practices.
China’s current account surplus, the broadest trade measure, fell from a peak of 10.1 percent of gross domestic product in 2007 to 2.6 percent last year.
As the U.S. recovery has strengthened, China’s attitude has softened. In 2010, the Chinese government’s annual defense white paper said progress toward a multipolar world, rather than one characterized by a single global superpower, was “irreversible.”
The latest defense study, released in April, dropped that reference, said Bonnie Glaser, senior Asia adviser at the Center for Strategic and International Studies. And during a recent meeting with researchers at a Communist Party institute in Beijing, Glaser says she was told that of 15 indicators of national power tracked by the Chinese government, the U.S. was still getting stronger on 10.
“They see the U.S. is resilient,” says Glaser. “They’re not as overconfident as they were and they can see their own problems more clearly.”
Upon becoming general secretary of the Chinese Communist Party in November, Xi spoke of a “China dream” amounting to “the great renewal of the Chinese nation.”
Yet he confronts daunting economic challenges. Slower growth means 30 percent to 50 percent of China’s 7 million college graduates this year may be unable to find work, according to Cheng Li of the Brookings Institution.
“The equation has changed,” says Nicholas Lardy, an expert on the Chinese economy at the Peterson Institute in Washington. “They’re struggling to keep the economy growing at 7.5 percent, and there’s a risk they won’t even make 7.5 percent this year.”
In March, Premier Li Keqiang promised a “self-imposed revolution” that would reduce government control over the economy while boosting market-oriented policies. Chinese officials have talked of liberalizing interest rates and moving toward full convertibility of the yuan.
Doing that would mean taking on powerful interests at home who benefit from current policy, including state-owned enterprises that enjoy preferential financing. For the Chinese leader, trouble abroad could only be a distraction from more pressing matters.
Obama, who has his own domestic battles to fight over immigration policy and a possible overhaul of the tax code, is seeking a Sino-U.S. thaw. As he heads to the summit, the focus will be on how well the men hit it off.
“There are myriad challenges confronting the U.S.-China relationship that require the most difficult kind of diplomacy,” says Campbell. “The personal relationship does matter.”
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