U.S., China Stage an Economic Balancing Act
Growing Tensions Will Test
Logic That Neither Wants
To Declare a Trade War
March 28, 2006; Page A12
Former Treasury Secretary Lawrence Summers calls the evolving U.S.-China relationship "a balance of financial terror," an unsettling concept for a new era.
The outgoing Harvard president's phrase echoes the U.S.-Soviet "balance of nuclear terror" that defined the Cold War. The mass of atomic weapons on each side prevented either protagonist from declaring war on the other due to what become known as MAD, or "mutually assured destruction."
As senior Washington and Beijing officials prepare for Chinese President Hu Jintao's summit with President Bush at the White House on April 20, a more unstable logic is being tested that has come to define the emerging superpower relationship that will define the first half of the 21st century.
The argument holds that both countries would be so economically devastated by a trade or financial war -- "mutually assured economic destruction" -- that neither would trigger one despite growing trade tensions.
By that logic, China won't stop buying billions of U.S. dollars each month because to do so could prompt a dollar collapse that would undermine the American consumer and the global stability upon which China's economic miracle rests. It follows that the U.S. would not implement tough sanctions to punish China's undervalued currency because such action could trigger inflation, higher interest rates and recession.
Don't bet on this logic holding.
Miscalculation is the mother of all unintended conflicts. Nuclear holocaust was more likely in the Cold War's early years, before the U.S. and Soviets had fully defined their relationship through a series of summits and near-crises. The same is true -- though the possible consequences less fatal -- at the beginning of this new superpower summitry.
"The direction that China and U.S.-China relations take will define the strategic future of the world for years to come," says economist Fred Bergsten, co-author of "China: The Balance Sheet," a book to be released this week that offers a comprehensive and penetrating analysis of the relationship. It's a three-part policy prescription: get China to play more by international rules (in letting its currency rise to market rates, protecting intellectual property, etc.); make China a key player in international organizations that protect those rules (instead of following its new course of establishing its own, Chinese-dominated organizations); and, perhaps most importantly, fix America's own high-debt, low-savings problem that over time will erode Washington's leverage with Beijing.
What worries Mr. Bergsten is that, in the meantime, "the world trade system could be blown apart if this financial imbalance is not addressed quickly and substantially."
The Bush administration's leverage with Beijing can only shrink over time. A weakened President Bush is losing control of China policy to a Congress in which Republican leaders are increasingly turning against him on a number of issues. Longer term, China's leverage will increase as it reduces its dependence on the U.S. market and gains political, economic and military power.
"Over a period of time, they will need us less," says Robert Hormats, vice chairman of Goldman Sachs, International.
For now, however, Mr. Bergsten says the Chinese reluctance to revalue a currency that Mr. Bergsten says is 20% to 40% below market rates miscalculates the seriousness of rising American protectionism.
The latest evidence of that seriousness is a new bill that the top Republican and Democrat on the powerful Senate Finance Committee will unveil at hearings this week. Committee Chairman Charles Grassley (R., Iowa), and Sen. Max Baucus (D., Mont.) have drawn up what could be a more effective and comprehensive attack on China than legislation on the table that threatens Beijing with across-the-board 27.5% tariffs.
The two senators are known for their free-trade credentials, underlining growing impatience with China. Their legislation is less blunt but more far-reaching than the tariff bill of Sens. Charles Schumer (D., N.Y.) and Lindsey Graham (R., S.C.).
A person familiar with the Grassley-Baucus bill, whose details haven't yet been publicly disclosed, says it would "significantly amend" current U.S. law in ways that would force the Treasury's hand on the exchange rate "in a directive manner." The bill would make China liable to countervailing duties as punishment not just for currency manipulation but also for a host of other state supports, the person says.
Yet for all the focus on trade tensions now, over time the U.S.-Chinese rivalry might be played out on the periphery, just as was the case between the U.S. and the Soviets during the Cold War. Taiwan will be high on the Bush-Hu summit agenda. Yet China, with its focus on domestic development, has avoided a crisis over Taiwan and instead wants to block independence rather than rush unification.
More unsettling are potential conflicts over energy. China's growing thirst for oil has prompted a buying spree of global energy assets and long-term contracts with countries that are among America's leading global problems: Iran, Sudan and Venezuela.
"One swing factor that will determine whether we have a cooperative or a confrontational relationship is how we address the issue of energy," says Mr. Hormats of Goldman Sachs. He has suggested to U.S. officials that Mr. Hu and Mr. Bush at the summit make a "U.S.-China Energy Partnership" a centerpiece, including development of clean coal, alternative energy sources and common efforts to keep open critical sea lanes. "This should be a centerpiece of Hu-Bush conversations."
Write to Frederick Kempe at [email protected]
Growing Tensions Will Test
Logic That Neither Wants
To Declare a Trade War
March 28, 2006; Page A12
Former Treasury Secretary Lawrence Summers calls the evolving U.S.-China relationship "a balance of financial terror," an unsettling concept for a new era.
The outgoing Harvard president's phrase echoes the U.S.-Soviet "balance of nuclear terror" that defined the Cold War. The mass of atomic weapons on each side prevented either protagonist from declaring war on the other due to what become known as MAD, or "mutually assured destruction."
As senior Washington and Beijing officials prepare for Chinese President Hu Jintao's summit with President Bush at the White House on April 20, a more unstable logic is being tested that has come to define the emerging superpower relationship that will define the first half of the 21st century.
The argument holds that both countries would be so economically devastated by a trade or financial war -- "mutually assured economic destruction" -- that neither would trigger one despite growing trade tensions.
By that logic, China won't stop buying billions of U.S. dollars each month because to do so could prompt a dollar collapse that would undermine the American consumer and the global stability upon which China's economic miracle rests. It follows that the U.S. would not implement tough sanctions to punish China's undervalued currency because such action could trigger inflation, higher interest rates and recession.
Don't bet on this logic holding.
Miscalculation is the mother of all unintended conflicts. Nuclear holocaust was more likely in the Cold War's early years, before the U.S. and Soviets had fully defined their relationship through a series of summits and near-crises. The same is true -- though the possible consequences less fatal -- at the beginning of this new superpower summitry.
"The direction that China and U.S.-China relations take will define the strategic future of the world for years to come," says economist Fred Bergsten, co-author of "China: The Balance Sheet," a book to be released this week that offers a comprehensive and penetrating analysis of the relationship. It's a three-part policy prescription: get China to play more by international rules (in letting its currency rise to market rates, protecting intellectual property, etc.); make China a key player in international organizations that protect those rules (instead of following its new course of establishing its own, Chinese-dominated organizations); and, perhaps most importantly, fix America's own high-debt, low-savings problem that over time will erode Washington's leverage with Beijing.
What worries Mr. Bergsten is that, in the meantime, "the world trade system could be blown apart if this financial imbalance is not addressed quickly and substantially."
The Bush administration's leverage with Beijing can only shrink over time. A weakened President Bush is losing control of China policy to a Congress in which Republican leaders are increasingly turning against him on a number of issues. Longer term, China's leverage will increase as it reduces its dependence on the U.S. market and gains political, economic and military power.
"Over a period of time, they will need us less," says Robert Hormats, vice chairman of Goldman Sachs, International.
For now, however, Mr. Bergsten says the Chinese reluctance to revalue a currency that Mr. Bergsten says is 20% to 40% below market rates miscalculates the seriousness of rising American protectionism.
The latest evidence of that seriousness is a new bill that the top Republican and Democrat on the powerful Senate Finance Committee will unveil at hearings this week. Committee Chairman Charles Grassley (R., Iowa), and Sen. Max Baucus (D., Mont.) have drawn up what could be a more effective and comprehensive attack on China than legislation on the table that threatens Beijing with across-the-board 27.5% tariffs.
The two senators are known for their free-trade credentials, underlining growing impatience with China. Their legislation is less blunt but more far-reaching than the tariff bill of Sens. Charles Schumer (D., N.Y.) and Lindsey Graham (R., S.C.).
A person familiar with the Grassley-Baucus bill, whose details haven't yet been publicly disclosed, says it would "significantly amend" current U.S. law in ways that would force the Treasury's hand on the exchange rate "in a directive manner." The bill would make China liable to countervailing duties as punishment not just for currency manipulation but also for a host of other state supports, the person says.
Yet for all the focus on trade tensions now, over time the U.S.-Chinese rivalry might be played out on the periphery, just as was the case between the U.S. and the Soviets during the Cold War. Taiwan will be high on the Bush-Hu summit agenda. Yet China, with its focus on domestic development, has avoided a crisis over Taiwan and instead wants to block independence rather than rush unification.
More unsettling are potential conflicts over energy. China's growing thirst for oil has prompted a buying spree of global energy assets and long-term contracts with countries that are among America's leading global problems: Iran, Sudan and Venezuela.
"One swing factor that will determine whether we have a cooperative or a confrontational relationship is how we address the issue of energy," says Mr. Hormats of Goldman Sachs. He has suggested to U.S. officials that Mr. Hu and Mr. Bush at the summit make a "U.S.-China Energy Partnership" a centerpiece, including development of clean coal, alternative energy sources and common efforts to keep open critical sea lanes. "This should be a centerpiece of Hu-Bush conversations."
Write to Frederick Kempe at [email protected]
