Clinton Set for Tough China Talks

On the last stop of the Secretary of State's Asia trip, amid the cooperative mood, the U.S.-China economic relationship presents several challenges

With both sides making nice, U.S. Secretary of State Hillary Rodham Clinton arrived in Beijing on the evening of Friday, Feb. 20, for a busy weekend of meetings with top Chinese officials. On the agenda is everything from North Korea and renewed military cooperation to climate change, including a visit to a gas-fired thermal power plant and a church service on Sunday.

It is "essential [the U.S. and China]…have a positive, cooperative relationship. It is vital to peace and prosperity, not only in the Asia-Pacific region, but worldwide," Clinton said at the Asia Society in New York on Feb. 13.

"We attach great importance to Sino-U.S. relations," said Foreign Ministry spokesperson Jiang Yu on Feb. 19, one day before Clinton's arrival. "We are ready to work together."

Says Peking University professor of international studies Wang Yong, "China is the most important stop and the grand finale of [Clinton's Asia] visit."

But even as both sides send signals about the importance of relations and their desire to cooperate (stopovers in China, Japan, South Korea, and Indonesia make up Clinton's first trip overseas as top diplomat), a host of looming economic challenges could easily destabilize the relationship soon. The swelling trade deficit, the slow pace of appreciation of the Chinese currency, and growing protectionism are bound to cause growing friction ahead.

The North Korea Nuclear Issue

North Korea and its nuclear aspirations are certain to be a major topic of discussion when Clinton meets with Chinese President Hu Jintao, a meeting now scheduled for Saturday afternoon. To date, six rounds of the so-called six-party talks, which bring together the U.S., China, Russia, Japan, and South and North Korea have failed to significantly reduce tension on the divided Korean Peninsula. And with North Korean leader Kim Jong Il believed to be seriously ill, Pyongyang has become even more unpredictable. Indeed, on Feb. 19, North Korean media reported that Pyongyang was ready for "all-out confrontation" with South Korea.

"Our goal is to try to come up with a strategy that is effective in influencing the behavior of the North Koreans at a time when the whole leadership situation is somewhat unclear," Clinton said shortly before her arrival in Beijing, according to a Feb. 19 Bloomberg report. "I want to hear directly from both South Koreans and the Chinese about what they think the next steps are. We obviously have some ideas, but we do want this to be shared responsibility." Accompanying Clinton to Beijing is Assistant Secretary of State Christopher Hill, point person on North Korea and four-year veteran of Korean Peninsula nuclear negotiations.

Beijing is already signaling its desire to work more closely with Washington, including in the often prickly field of military cooperation. On Feb. 16, Beijing announced it planned to resume military-to-military contacts with the U.S., stalled since last October when the Bush Administration approved $6.5 billion in arms sales to Taiwan. "The mainland and the U.S. will resume their military talks with a defense policy dialogue in Beijing," the official English-language China Daily reported Feb. 16.

Also on the table: climate change, and how the world's two largest emitters of greenhouse gasses can cooperate on the problem. Clinton has stated that making progress on climate change is a key priority of the China visit, and has brought her top aide for dealing with this thorny environmental issue to Beijing. "As the largest developing and developed countries, China and the U.S. have attached great importance to climate change issues. To strengthen China and the U.S.'s cooperation in the field of climate change is in accordance with the interests of both countries," Foreign Ministry spokesperson Jiang Yu said on Feb. 19.

Disagreement on Economic Matters

But while cooperation, particularly in the political and environmental arenas, may dominate headlines during the visit, the two sides are less likely to reach agreement when it comes to economic frictions. As the world slips deeper into recession, economic protectionism aimed at Chinese exports is a growing concern in Beijing. "Buy American" measures in the $787 billion U.S. stimulus package are a "poison," the Chinese government's official Xinhua News Agency commented on Feb. 14. "We think trade protectionist measures will escalate the already serious economic situation under the financial crisis," Commerce Ministry spokesman Yao Jian said at a Beijing press conference on Feb. 16.

China is also increasingly worried about the eroding value of its dollar holdings, estimated to total almost $700 billion of its $1.95 trillion in reserves. "We hope countries whose currencies are the main holdings in our international reserves will take effective measures to cope with the financial crisis," said Fang Shangpu, deputy director at the State Administration for Foreign Exchange, on Feb. 18. "They should work to maintain economic and financial stability, and protect the interests and confidence of investors."

Washington, for its part, is deeply concerned about the $266 billion U.S. trade deficit. Recent comments by Vice-President Joseph Biden and Treasury Secretary Timothy F. Geithner pressuring Beijing for a faster appreciation of the yuan are likely to raise Chinese hackles and irritate the relationship. "It is not advisable to take extreme measures to forcibly correct the trade imbalance between China and the U.S., or force the [renminbi] to appreciate," says Peking University's Wang Yong. "Such actions will eventually hurt the economies of China and the U.S." Despite the comfortable talk of mutual cooperation, expect fissures to widen when it comes to the Sino-U.S. economic relationship.

Before it's here, it's on the Bloomberg Terminal.