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Hu Cometh

by Evan A. Feigenbaum
January 15, 2011

U.S. President George W. Bush and Chinese President Hu Jintao watch members of the Old Guard march during a welcoming ceremony on the South Lawn of the White House April 20, 2006.

U.S. President George W. Bush and Chinese President Hu Jintao watch members of the Old Guard march during a welcoming ceremony on the South Lawn of the White House April 20, 2006. (Kevin Lamarque/Courtesy Reuters)

Chinese president Hu Jintao arrives in Washington this week.  And after a year of difficult relations, it’s probably a good time to ask whether the two sides can’t revitalize at least some elements of their elaborate and detailed 2009 Joint Statement.

China has prepped the ground for Hu’s visit by ratcheting back its rhetoric and presenting a friendly face.  A January 10 op-ed in the Financial Times by Li Keqiang (China’s premier-in-waiting) argued that domestic demand has accelerated while 2010 imports “may well top $1,390 billion, ranking second in the world.” China’s message: “we get it, World; so ease off on rebalancing.”  Meanwhile, Beijing hosted U.S. defense secretary Robert Gates on 11 January, restoring high-level military dialogue after a long hiatus.

But the fluttering flags, red-coated fife and drum corps, and 21 cannon shots will belie the reality of a rapidly changing U.S.-China relationship.

What the visit can do is to clear the air in some areas while yielding symbolic initiatives in others.  But while positive statements, and perhaps even actions, are probable, the central challenges of U.S.-China relations are increasingly structural.

For one, many, both in and out of China’s government, want to test what Beijing’s growing weight might yield. They are confident of China’s growing strength and relish the opportunity to, at minimum, make Washington work harder for Chinese support of ostensibly shared objectives.  Many in China wish to see if Washington will accommodate a wider array of Chinese interests.

For their part, many in Washington have been chastened by China’s choices of the past 9-12 months—as has nearly every country in Asia. In 2009 and 2010, Beijing was far less accommodating than many in the Obama administration had hoped of U.S. preferences on issues from climate, to the pace of renminbi appreciation, to coordinated action in response to North Korean provocations.  Despite successes—for example, mutual support for Iran-related sanctions in the UN Security Council—China’s deliberate, self-interested approach in many areas simply did not mesh with American exhortations or expectations.  And on Iran, for example, China has not changed its fundamental approach: It retains strong interests in commercial cooperation with Iran and seeks to maintain its energy interests, in particular, even if it ultimately respects sanctions.  Chinese oil companies are long-term players who hope to weather the current storm and maintain a presence. They will not likely proceed with new contracts and are slowing down old ones in the short term; they will, however, retain ties to the current Iranian regime and position themselves to move quickly when the present environment changes.

Meanwhile, supportive domestic constituencies (who have long provided ballast to U.S.-China relations in tough times) continue to fracture.  China’s central bank has, in various ways, made the case for currency appreciation.  But Chinese export lobbies continue to resist, arguing that many companies will go under and China will suffer massive job losses.  And this dynamic plays out on the American side too:  a once-solid business lobby has, quite clearly, become more conflicted. Few, if any, U.S. firms are pulling out of China.  But, for example, a 2010 survey from the American Chamber of Commerce in China put the percentage of U.S. companies that feel unwelcome in the Chinese market at 38 percent, up 15 points from 23 percent just two years earlier in 2008.  And that sentiment extends beyond technology companies, like Google, into the manufacturing sector, with a variety of companies now complaining about a host of issues, from intellectual property theft to non-tariff barriers to various aspects of China’s regulatory regime.

Are these challenges manageable?  Probably.  But China and the U.S. have become centerpieces in wider strategic and economic debates on each side that will play out, ultimately, in each side’s domestic politics — and are bigger than bilateral relations per se.

In the U.S., these include: (1) the future of American manufacturing, competitiveness, and innovation; (2) the future of U.S. primacy in Asia; and (3) what kind of global arrangements best serve U.S. interests.

In China, such debates include: (1) the pace and scope of economic rebalancing; (2) whether (and when) to knuckle under to international pressure on China’s currency and industrial policies; and (3) how to bolster Chinese military projection.

So, while the U.S. and China are deeply interdependent, a growing number of stakeholders on both sides find that reality deeply disquieting.  And these structural changes comprise the backdrop to Hu’s visit.

Just take Chinese industrial policy:  if 2010 was dominated by the currency issue, 2011 may well see industrial policies rise to the fore, especially if China sustains a gradual appreciation of the renminbi.

But such tensions will be especially challenging because they strike at the core of each country’s economic competitiveness:  China’s ability to compete with U.S. firms has improved faster in some areas than many had anticipated.  From high-speed rail to nuclear power plants, China’s capacity to digest foreign technology, re-engineer it to Chinese specifications, and then produce (but as a lower-cost competitor) have unnerved a host of foreign companies, who now question the wisdom of transferring technology to China.  The underlying fear is that if China can quickly produce substitutable (but cheaper) products, then foreign firms will be marginalized.  And Hu’s trip will, in some sense, showcase just how difficult it will be for the U.S. to coordinate actions and responses as the complexities of this Chinese challenge vary across sectors and affect distinct companies differently.

For this reason, China’s “indigenous innovation” policy will be much discussed during the visit, particularly the terms of prospective Chinese accession to the WTO government procurement agreement.  But the summit will likely produce agreements only on principles and frameworks … if even that.

U.S.-China relations have been fraught since at least the 1980s.  And let’s be clear:  the two have had numerous ups and downs, and they have seen worse—much worse—than their current spate of tension.

But structural changes are afoot that are sure to make the next several years more difficult.  And even when the two sides share interests, divergent threat assessments and countervailing interests too often obstruct efforts to fashion complementary policies.

Post a Comment 3 Comments

  • Posted by Hugh Campbell

    An America Lost in Squanderville

    The United States’ trade gap is the proverbial “leak-in the-dike” with its de-simulative effect on our recovery. In November 2003, Warren Buffett in his Fortune, Squanderville versus Thriftville article recommended that America adopt a balanced trade model. The fact that advice advocating balance and sustainability, from a sage the caliber of Warren Buffett, could be virtually ignored for over seven years is unfathomable. Media coverage that China has kept it currency undervalued is a gross understatement, it has actually been keeping the U.S. dollar over-valued; which adversely affects all our trade with all our trading partners, not just trade with China. Until action is taken on Buffett’s or a similar balanced trade model, by the powers that be, America will continue to squander time, treasure and talent in pursuit of an illusionary recovery.

  • Posted by Gringo Capet

    Hugh Campbell’s point on the need for a balanced trade policy is well-taken. This balance needs to be built on an understanding of what the imbalance is built on. The general consensus is that about 65% of Chinese exports, including exports to the USA, are from foreign-owned or invested producers and assemblers; that a substantial proportion of value-addition of export goods occurs outside China; that final assembly may have moved to Chinese factories, but in many cases, major components still come in from Japan, South Korea, Taiwan and other US allies and partners. There is even a reasonably logical argument that the USA needs to look at its global trade balance, rather than balance vis-a-vis any one trading partner. In a globalised world, that can probably make sound sense.

    The US and Chinese economies and financial systems are semi-symbiotically intertwined. Just look at the amount of China’s reserves denominated in dollars and the volume of US T-Bills in that stock. Neither party (or, yes, partner – in economic-financial terms) can afford to subvert the otehr’s interests without suffering sever losses itself. In a way, the relationship has developed its own MAD (mutual assured destruction) quality. If only politicians and commentators woke up to this fact, on both sides of the Pacific (in name only!)

    China will seek to take advantage of the system to the extent the market will bear. But before putting inordinate pressure on China and threaten the system, let’s recall Secretary Clinton’s question to then-Prime Minister Kevin Rudd, ‘How do you act toughly with your bank manager?’ (forgive any inadvetent phraseological inaccuracy). The critical question is, can the USA take responsibility for its own production-consumption imbalances before it demands others change their ways?

    Fundamentally, if the US believes Chinese assurances that Beijing neither wishes nor has the capability to displace the US from its systemic leadership pile, but would seek to reform the system modestly so that hostile naval and air forces do not feel free to engage in perpetual snooping around its territorial and coastal waters and air-space on the ground of ‘freedom of navigation’ when their passage is clearly not ‘innocent.’ China has been complaining about hegemonic containment designs at least since 1996 – Beijing’s own recent statements have aroused neighbourhood anxiety levels, but should any country which has not signed up to the UNCLOS demand that others adhere to its terms and conditions? Consistency should begin at home, no?

    Gringo Capet

  • Posted by Frank Lupotelli

    Several media publications have contrasted the push/pull style of George W Bush with Hu versus the bowing of Obama with Hu… difference in diplomatic style/ability of the presidents, or sign of changing relations?

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