Last year was a year of unprecedented American deference to China. On nearly every front, the Obama administration sought to engage and reassure China on security, economic and business issues. After all, China was buying a lot of US debt, and was and is a source of growth for US companies, helping compensate for home markets that still seem markedly queasy. In exchange, Beijing threw its weight around, publicly chastising US economic management, refusing to revalue the renminbi, and sending Wen Jiabao to North Korea. And while Chinese rhetoric followed the win-win free trade script, as soon as China finished bashing the US for "Buy American" provisions in the US stimulus package, it went on to enact both overt and tacit "Buy China" provisions in its own. At the same time, Chinese hackers allegedly penetrated the US energy infrastructure with sleeper agent viruses. The US response to all of this was distinctively muted. The Obama administration allowed Beijing to hijack and redirect Obama’s first visit to the country; when Chinese diplomats "forgot" to invite him to side meetings at Copenhagen, he had to crash. Where China was once an artistic negotiator on both security and economic policy, it appears that the current policy-led economic interregnum has led some Chinese leaders to start getting high on their own rhetorical supply. It’s one thing to predict that China will ultimately surpass the US. It’s quite another to believe it has already occurred, but the self-congratulatory state media has done much to convince Chinese citizens and politicians that this is precisely what happened last year.
Today it appears that US policymakers, and some business interests, have concluded that they have little to show for indulging Bejing’s grandstanding. After all this, China is still uncooperative on issues like Iran, has done little to curtail North Korea, and appears hell-bent on convincing US firms and US employees that they are no longer needed here. While the weak renminbi has helped Chinese exports to the US recover, its prejudice against foreign knowledge-based firms has convinced American companies that they have nothing to gain from technology transfer agreements, in particular on green technology – which played a significant part in sabotaging Copenhagen. It also makes prospects for ameliorating the trade imbalance seem as distant as ever. All this has made the Obama administration appear weak domestically at a time when it least needs it.
As the sun rises on 2010 therefore, it is illuminating a long line Americans queuing up to file trade disputes over product dumping. The tensions are metastasizing: January started off with a very public (and probably unwelcome, from Google’s perspective) US government endorsement of Google’s decision to pull out of China. And the month ended with a decision to hurry up a US$6 billion arms sale to Taiwan, which has resulted in the predictable protest from Beijing and a warning that the decision will damage military and economic cooperation etc.
Unfortunately for Beijing, it has already used most of its ammunition. Enhanced military dialogue did not prevent the Chinese navy from harassing US ships in what the US considers international waters; economic cooperation has not seen a revaluation of the renminbi (although China is now making noises to that effect), nor has diplomacy prevented the nuclearization of the Korean peninsula or Iran. And while China talks a lot about "regional cooperation," what it has meant in practice is US acquiescence to China’s dominance of East and Southeast Asia. The Obama administration, along with many other Western governments and businesses, is clearly beginning to wonder what difference it makes whether they cooperate or not. Yes, China is still pitching in to buy US Treasury bonds, albeit at a slower rate, but this is hardly because Beijing wants to help the US, but rather because its currency regime gives it no choice but to maintain large dollar reserves. And the argument that cheap Chinese manufactures help Western economies by keeping prices low is starting to show some strain after a long series of public product quality scandals which the government seems unable to bring under control. Over the product lifespan, Chinese goods are clearly not as cheap as they look, and that lowers the perceived switching costs that once bound US manufacturers to China so tightly. As for the US fantasy of a billion-person market for their goods, onerous joint-venture/tech transfer requirements in certain sectors make it appear that China considers purchasing foreign goods an unpleasant but temporary necessity.
While these sorts of tensions are endemic to the relationship between China and the West, in particular to US-Sino relations, we believe that 2010 will be a true test of the depth of economic linkages and mutual interests between the two largest powers on the Pacific Rim. Bringing weapons deals into the equation is a worrisome sign, as are rumors that Obama plans to meet with the Dalai Lama. These are both highly incendiary moves, and one wonders whether there were not more subtle ways to accomplish the same goal. At the same time, Beijing would do well to remember that while many are predicting that current US weakness is the new permanent status quo, such predictions have been made before and have been proven wishful thinking. Even if the predictions are true, even at its weakest, the US is still the world’s largest economy – and is still the ultimate target for much of China’s exports. Frightening Americans may play well at home, but it is clearly a risky strategy. At least for now, China needs Americans – and by extension other Westerners – to believe that a stronger China will not come at their expense. At the same time, the idea that the US is trying to extract economic concessions from China by arming Taiwan and meeting with the Dalai Lama seems ridiculous. We hope the recent round of Sino-US griping is more business-as-usual, as opposed to a genuine loss of interest in collaboration.