Complicated U.S.-China Dance Could Be Headed for Rough Turn

What Have We Learned About Obama's Trip to Asia So Far?
  • Trump and Clinton have promised tougher stance on China
  • Obama administration preparing for final bilateral dialogue

U.S. Treasury Secretary Jacob J. Lew was about to urge China to move toward a market-based exchange rate when his hosts in Beijing decided the media had heard enough.

While Lew addressed Premier Li Keqiang, Chinese officials tried to usher foreign reporters out of the stately reception room at Zhongnanhai, the closely guarded leadership compound next to the Forbidden City. But Treasury aides insisted the journalists stay until the end of Lew’s remarks, adding tension to an otherwise unremarkable photo-op. The Chinese conceded, but the incident in February illustrates the differences lingering between the world’s two biggest economies after more than four decades of diplomacy.

Complicated in the best of times, economic relations between the U.S. and China may be poised to enter a new period of turbulence. American presidential candidates are pledging a tougher stand against the Communist-controlled nation, China’s top central banker is approaching retirement and the nation’s leaders are struggling to manage a shift to a new growth model.

A daunting set of challenges awaits the next American president, whether it’s Hillary Clinton or Donald Trump: questions about China’s commitment not to devalue its currency amid persistent capital outflows, stalled negotiations on a trade deal that would make it easier for U.S. companies to invest in China, and concern about Chinese piracy of U.S. intellectual property.

That’s not to mention hostility toward China among both Republicans and Democrats in Congress, and tensions on foreign-policy issues such as cyber-security and the military balance of power in the South China Sea.

‘Wrong Direction’

“There’s definitely a clear momentum in the wrong direction,” said Scott Kennedy, a China scholar at the Center for Strategic and International Studies in Washington. “The level of trust is somewhere near scraping the bottom.”

That’s the backdrop for the Obama administration’s last major bilateral confab with China. Lew and Secretary of State John Kerry will travel to Beijing for talks June 6-7 under the Strategic and Economic Dialogue, a forum for discussions between the two powers.

Former president George W. Bush and then-Chinese leader Hu Jintao started the dialogue in 2006, with a focus on economic relations. In 2009, Obama and Hu added a separate foreign-policy track to the talks, led by State Department officials and their Chinese counterparts.

Some observers say the talks appear to be drifting.

“There’s no clear leader in the U.S. administration on U.S.-China relations,” said David Loevinger, a former China specialist at the Treasury and now an analyst at fund manager TCW Group Inc. in Los Angeles. “Lew’s done a good job, Kerry’s done a good job, but there’s no point person.”

Such an assertion is wrong, said Wally Adeyemo, President Barack Obama’s deputy national security adviser for international economics. The dialogue has established Lew and Kerry as leaders of their respective tracks, and various people have helped “put us in a position to make progress with regard to the bilateral relationship,” Adeyemo said in an interview.

Improved Access

Adeyemo said the China relationship during the Obama administration “has been one where we have seen a great deal done that has improved access for our firms and our workers to the Chinese economy.”

Relations have deepened in ways that make them more impervious to the winds of U.S. politics. Last year, China unseated Canada for the first time as the U.S’s biggest trading partner. Trade between the U.S. and China has risen 43 percent to $626.8 billion since Obama took office in early 2009.

The boost in trade is “a clear recognition on both sides that they have something to gain from each other,” said Eswar Prasad, a former chief of the International Monetary Fund’s China division and now a professor at Cornell University in Ithaca, New York.

Some of the headway is even more tangible. Starbucks Corp. is planning on boosting expansion in China, while Apple Inc. just invested $1 billion in the largest ride-hailing service in the Asian nation. Chinese companies invested a record $15.7 billion in the U.S. in 2015, up 30 percent from the previous year, according to Rhodium Group.

Then there are ties in areas such as education, with Blackstone Group LP’s billionaire chairman Stephen Schwarzman in 2013 setting up a $300 million scholarship fund for foreign students to attend China’s prestigious Tsinghua University.

“The commercial interests on both sides very much want to keep things on an even keel but don’t want their governments to give away too much either,” Prasad said.

Uncertainty remains about the ability of Chinese policy makers to manage the transition toward an economy less reliant on exports and investment for growth. The IMF projects China’s gross domestic product will expand 6.5 percent this year, which would be the slowest pace in more than a quarter century.

Engagement Needed

“China is in the middle of one of the most difficult economic transitions that any country has ever gone through” and needs “to stay on the course of reform, to stay on the course of opening to market pressures,” Lew said during a May 13 event in Washington. “We’ve made progress, we will continue to make more, but it’s going to require ongoing engagement.”

After a series of missteps shook investor confidence, PBOC Governor Zhou Xiaochuan reassured markets in February that the country was committed to its stated currency policy. But the 68-year-old is in his 14th year as central bank chief, and his successor may need time to build credibility.

The U.S. last year backed China’s entry into the IMF’s basket of reserve currencies, placing the yuan alongside the dollar, yen, euro and pound. Congress also agreed to give China the third-biggest voice at the IMF, behind the U.S. and Japan.

While tension over whether the yuan is undervalued has faded, “the problem may simply be in remission,” said Fred Bergsten, who headed the Peterson Institute for International Economics for three decades.

U.S. politics may soon provide a jolt. Trump has promised to label China a currency manipulator as soon as he takes office, as well as slap tariffs on Chinese imports if the country doesn’t “behave.” For her part, Clinton has said the next president “has to understand the games Beijing plays and be prepared to stop it.”

The question is whether this year’s presidential candidates will, as in the past, back off once in office from things said in the heat of campaigning -- or break with tradition and follow through.

“Whoever is president of the United States will have to deal with China, and to a large extent they will have to deal with China on China’s terms,” said David Dollar, a senior fellow at the Brookings Institution in Washington who was previously U.S. Treasury attaché in Beijing. “The Chinese have a lot of self-confidence.”

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