Will US hit back at China?

By S.P.SETH

Over the years China has learnt how to play hard and soft with the United States, depending on the situation. After hectoring and warning the United States recently about China’s territorial sovereignty over the South China Sea, and Yellow Sea (objecting to the joint US-South Korean military exercises), and generally making a claim for regional primacy, Beijing is reversing the gear slightly to calm Washington’s ruffled feathers.

This was apparent at the high level reception accorded early this month for Larry Summers, President Obama’s senior economic advisor and Thomas Donilon, deputy national security advisor. They were apparently there to discuss economic and security relations.

These two officials were received by President Hu Jintao, and a bevy of government and party heavy weights like Premier Wen Jiabao and others. While the content of their conversations with the Chinese leaders is not revealed, they are believed to have been “frank” and “productive”--- whatever that might mean.

Considering that the US-China bilateral relationship has been quite tense lately, it might be assumed that the US officials went there to do some straight talking, both on economic and security issues.

On the economy, the high value of Chinese currency is a major issue in the United States. And on the security front, China’s recent saber rattling must have figured prominently.

If the US officials did some tough talking, Beijing wasn’t showing its discomfiture. Indeed, some Chinese (non-official) sources reportedly sought to put the best spin on the visit: that it might lead to improved military ties, and that the recently upgraded ties with North Korea weren’t based on friendship but on realpolitik.

As Zhu Feng, a Chinese academic, reportedly said, “Kim Jong-il wants to be spoiled over a new cold war between China and the US. They think it’s a very big chance to earn big aid and support from China.”

He added that the US officials’ visit and their high level reception would, “…be a very big message to the Dear Leader that China and the US are staying on course and there will be no new cold war.”

What Beijing seems to be conveying, albeit through non-official sources, is that its upgraded ties with North Korea are only a tactical shift and might be reversed for a quid pro quo from the United States like, for example, the withdrawal of US support for Taiwan.

In other words, if the US were to recognize China’s regional primacy, Beijing would be more cooperative.

The point, though, is that in that case Beijing would have achieved almost all of its objectives in Asia-Pacific, with the US losing face and credibility in the region.

At this point of time, it doesn’t look like that the US would be prepared to pay such a high price for China’s friendship.

Even if China’s softer face with the visiting US officials is intended to reassure the United States on political and security issues, the undervalued yuan remains as intractable as ever.

There are moves in the U.S. Congress for legislating levies on Chinese exports into the United States because of the unfair advantage China has from its undervalued currency.

As Paul Krugman recently wrote in his New York Times column, “Right now, China is following a policy that is, in effect, one of imposing high tariffs and providing large export subsidies, because that’s what an undervalued currency does.”

Krugman argues that, “…what China is doing amounts to a seriously predatory trade policy, the kind of thing that is supposed to be prevented by the threat of sanctions.” And he is for going all the way to force the issue with China.

As he says in his column, “I say confront the issue head on and if it leads to trade conflict, bear in mind that in a depressed world economy, surplus countries [like China] have a lot to lose…while deficit countries may end up gaining.”

The US administration is under considerable pressure in the Congress on the question of China’s unfair trade advantage from an undervalued currency. To relieve that pressure it is simultaneously moving the World Trade Organization to look into China’s unfair trade practices like, for instance, blocking US steel exports into China.

According to Ron Kirk, US trade representative, “The duties imposed by China have raised the price of hundreds of millions of dollars’ worth of American steel headed into China, with the practical effect of reducing or blocking exports of our steel to that country.”

And he warned that, “This case makes clear that the United States will not permit China to threaten American steelworkers’ jobs by using anti-dumping and countervailing duty proceedings to harass US exports.”

It is quite clear that until and unless there is some resolution of China’s undervalued currency, and lifting of its measures to restrict and block US exports, US-China economic relationship might be headed toward a trade war. Certainly, the US’ yearly trade deficit with China of over $200 billion is unsustainable.

Many in the US Congress are highly agitated calling for countermeasures, like imposing high tariffs and other penalties on Chinese goods headed to the US.

According to Senator Charles Schumer, “China’s currency manipulation is like a boot on the throat of our recovery and this administration refuses to try to get China to remove that boot.”

The Obama administration is still reluctant to call China’s undervalued yuan as a case of currency manipulation; even though candidate Obama had no hesitation in using this terminology during his election campaign.

China is trying to lower the heat by allowing a small appreciation of its currency. But that wouldn’t solve the problem.

As Treasury Secretary, Timothy Geithner, told the Senate Banking Committee, “We’d like to see a sustained period of appreciation”, designed to largely erase the yuan’s undervaluation.

China’s response is, as it has always been, to show small gestures (like minor appreciation of yuan) to hopefully relieve internal pressures on the US administration. It is part of the pattern to soften the US while still holding on to a hard line position.

Will it work? China has certainly managed it well over the years, while it continues to build up its economic and political power.

The strategy seems to be that as China gets stronger, the US might not have much leverage to influence its policies from a weaker position.

On the other hand, China’s brinkmanship over a whole range of economic, political and security issues might push the US into a situation where it has no option but to hit back.

China is obviously taking a calculated risk, emboldened by the United States’ timid response so far for fear of escalating the developing crisis in US-China relations.