Obama, Xi Have Window to Improve U.S.-China Relations, Rudd Says

President Barack Obama and China’s Xi Jinping have a chance to shape policies that accommodate the Asian nation’s growing military and economic power, former Australian Prime Minister Kevin Rudd said.

The world’s two largest economies must overcome a lack of understanding as a territorial dispute between China and U.S. ally Japan threatens the region’s security, Rudd, a Mandarin-speaking former diplomat in Beijing, said in a speech to business leaders hosted by Bloomberg in Melbourne yesterday.

“The Chinese are working through the question of how they deploy their influence and power in the region and the world,” Rudd said. “This is still an open question which is why I think this is a critical period where a window is temporarily opened for the United States and China to work through how this will be shaped in the future.”

China, the biggest spender on defense after the U.S., has become increasingly assertive in the region as Obama executes a strategic shift toward Asia. Tensions have escalated between China and Japan over uninhabited East China Sea islands claimed by both countries, with the government in Tokyo last month accusing China’s military of using weapons-targeting radar on one of its destroyers.

“The trajectory of China–Japan relations has been increasingly negative for some time,” said Rudd, 55, who was a diplomat in Stockholm and Beijing between 1981 and 1988. “There is something of a nationalist tinderbox surrounding this.”

Trade Relations

The dispute between Asia’s two largest economies reignited after the Japanese government bought three of the islands from a private owner in September. The move set off riots in China, damaging the $340 billion bilateral trade relationship.

Obama is expanding the U.S footprint in the Asia-Pacific region as China’s military power grows. Along with longstanding disputes over intellectual property rights and the yuan exchange rate, China and the U.S. are grappling with diplomatic issues such as nuclear programs in Iran and North Korea.

The U.S. and China are “two mutually non-comprehending powers,” Rudd said. “They are going to require an extraordinary level of statecraft both on the part of the Chinese and the Americans.”

China, Australia’s biggest trading partner, in November chose Xi to replace Hu Jintao as head of the Chinese Communist Party and the nation’s military, ushering in the fifth generation of leaders. Xi is expected to be named president at the National People’s Congress next month.

U.S. Dominance

China surpassed the U.S. to become the world’s biggest trading nation last year as measured by the sum of exports and imports, ending the U.S. dominance in global commerce dating from the end of World War II in 1945, according to the U.S. Commerce Department.

China’s gross domestic product rose 7.9 percent in the final three months of 2012 from the same period a year earlier, halting a seven-quarter deceleration. The World Bank forecasts economic growth will quicken to 8.4 percent this year, more than four times the pace of the U.S.

The world must come to terms with the inevitable shift in power as China’s economy surpasses the U.S., Rudd said.

“This will be the first time since George III was on the throne that a non-Western, non-English speaking, non-democracy will be the largest economy in the world,” said Rudd.

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