Saturday 7 February 2009
Smart of US to avoid showdown with China
Washington has backed away from a confrontation with China after Treasury Secretary Tim Geithner said during confirmation hearings that ‘President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency’.
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Smart of US to avoid showdown with China
By FRANK CHING
6 February 2009
Washington has backed away from a confrontation with China after Treasury Secretary Tim Geithner said during confirmation hearings that ‘President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency’.
China immediately hit back, denying that it manipulated its currency to get an unfair trade advantage. Within days, Vice-President Joe Biden said on television: ‘There’s been no judgment based in the administration that there has been a manipulation.’ That word, he explained, ‘triggers within trade agreements certain responses’.
And President Barack Obama himself phoned President Hu Jintao to give further reassurances. Mr. Obama has received much advice on the importance of China, including making that country the destination of his first foreign trip, but he has rejected it, deciding instead to visit Canada. Even where telephone calls are concerned, he followed tradition by first calling Japanese Prime Minister Taro Aso before calling Mr. Hu.
According to the White House, in the telephone conversation, the two leaders pledged to ‘build a more positive and constructive US-China relationship’. They discussed a wide range of issues, including global trade imbalances, and agreed to work together to stimulate economic growth and to smooth credit flows. They agreed to meet in April in London for summit talks on the economic crisis.
Other issues discussed include the North Korean nuclear weapons programme as well as Iran, Afghanistan and Pakistan, counter-terrorism and climate change.
According to Xinhua, the official Chinese news agency, Mr. Obama had described the ties between the US and China as the most important bilateral relationship for both sides - something that was not reported by the White House.
What Mr. Geithner said was based on campaign statements made by Mr. Obama, and the candidate had gone on to say that, if he became president, he would use ‘all diplomatic avenues available’ to push for changes in China’s currency practices.
But that was before the onset of the global financial crisis. The last thing the US needs now is a trade war with China. China is already America’s biggest creditor and Washington wants Beijing to continue buying its Treasury bonds as the US goes into massive deficit spending to stimulate the economy.
Premier Wen Jiabao said on Saturday that a stable yuan is in everyone’s interests. He also said that whether China continues to buy American debt would depend on its need to protect the value of its foreign investments.
During the Bush administration, treasury secretary Henry Paulson was the lead person on China policy, heading the semi-annual Strategic Economic Dialogue with Beijing. It is unlikely that Mr. Geithner will play a similar role, particularly in view of his gaffe.
Hillary Clinton, the new Secretary of State, hinted as much when she said at a Jan 27 press conference that the US needs ‘a comprehensive dialogue’ with China and while the economy is a very important aspect of the bilateral relationship, ‘it is not the only aspect of our relationship’. This raises the possibility that the Senior Dialogue, headed previously by the deputy secretary of state, may become the main channel for dialogue and that State rather than Treasury may become the main interlocutor with China.
That would be fine but it is important that a high-level economic dialogue should continue to take place, especially at a time when economic problems are assuming greater importance in the relationship.
Besides, the currency problem is not going to go away. In April, the Treasury Department is due to issue another of its six-monthly reports on global currency policies, and the US will have to decide whether to accuse Beijing of currency manipulation. Such a charge could trigger sanctions against China, which would certainly lead to Chinese reprisals. For this reason, the Bush administration never made such a determination.
However, Mr. Biden, in commenting on whether China was manipulating its currency, said that the Obama administration would say things to China that the Bush administration ‘was reluctant to do’.
China has repeatedly warned against protectionist measures, but signs of protectionism are already evident with Congress attaching a ‘buy American’ provision to the stimulus legislation backed by Obama. This may well have the same impact as the Smoot-Hawley Tariff Act of 1930, which preceded the Great Depression.
The Obama administration needs to bear in mind that any attempt to punish China will have a negative impact on the US economy. And the impact will be much more immediate because of globalisation.
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