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The Importance of U.S.-China Relations

SOURCE: AP/Martin Bureau

President Barack Obama should meet with Chinese President Hu Jintao (above) at the earliest opportunity to signal the importance of China’s relationship to the United States.

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There is good and bad news about the Chinese economy—both of which point to the critical importance of U.S.-China relations amid the global economic downturn.

First, the bad news. The Chinese economy is slowing down faster than expected, dashing expectations that China could become an alternative engine for global growth. China’s gross domestic product growth slowed to 6.8 percent in the fourth quarter of 2008, a drop from 9 percent in the previous quarter and from 13 percent a year earlier. The United States can only dream about 6.8 percent GDP growth, but for China, this number is downright terrible. What’s worse, analysts estimate that the Chinese economy could slow to 5 percent over the course of 2009.

Chinese leaders have stated China needs at least 8 percent growth annually to maintain social stability and create enough jobs for the millions of workers entering urban areas each year. The grim economic forecast means the Chinese leadership is under intense pressure to spur growth again. And that brings us to the debate over the value of the Chinese currency.

Until recently, the United States and China were making real progress on the currency issue. Since 2005, China incrementally has raised the value of the yuan against the dollar by more than 20 percent, to 6.84 yuan to the dollar, before holding the rate steady beginning in mid-2008. The appreciation in the yuan’s value meant a more competitive edge for American exporters, but since the onset of the financial crisis and slowing GDP growth in China, this trend has stalled. China has limited the value of the yuan to 6.83 to 6.84 to the dollar over the past month while it seeks to prevent big capital outflows. In December, China’s overall imports also fell 21.3 percent from a year earlier to $72.18 billion—a dramatic drop that means fewer customers for U.S. goods.

The Bush administration never officially designated China as a currency manipulator, and China expectedly continues to contest any such label. But in a written statement submitted to the Senate Finance Committee during his confirmation hearing, Treasury Secretary Timothy Geithner stated, “President Obama—backed by the conclusions of a broad range of economists—believes that China is manipulating its currency.” The White House later clarified that Geithner didn’t mean to imply that he thought, as the soon-to-be Treasury Secretary, that China was in fact manipulating its currency.

Whether this was an intentional sign or just the result of vetting channels not being fully established in a very new White House—as some have suggested—the strategy of letting Congress know early on that the Treasury will be vigilant with regard to the Chinese currency is probably smart politics. A variety of bills continue to float around Capitol Hill that could well spark an escalating battle of punitive measures. To be sure, the United States must hold China to account for unfair actions, but a trade war is not helpful.  We cannot forget that putting up barriers to trade such as the Smoot-Hawley Tariff Act exacerbated the Great Depression.

Meanwhile, there is also good economic news out of China. Beijing just announced that it plans to spend $124 billion over the next three years to repair the nation’s heath care system and provide “universal” health care for its citizens. This is the kind of program the United States has been urging China to adopt.

A primary reason for our huge trade imbalance is the great disparity of savings rates in our two countries. The United States saves close to zero percent of GDP, while the Chinese save a staggering 50 percent. To rebalance, the United States needs to save more, and the Chinese need to spend more. Problem is, the Chinese public health care system is prohibitively expensive for average Chinese and the pension system is weak. What’s more, unemployment benefits in China are paltry, and education systems are too costly for many families.

These are all reasons why the Chinese save aggressively to protect against hard times—knowing they are one accident, ailment, or scam away from poverty. A functioning and affordable health care system would go a long way in alleviating fears and could in the short term spur spending, while in the long term revive the Chinese economy and help to create a broad middle class.

Ultimately, this is the best outcome for U.S. workers. The more people in China (and other developing countries) who leave poverty behind and enter a secure middle class, the more they will create demand for their own country’s products, as well as American exports, bringing up living standards in both countries. It is what the Center calls a “virtuous circle” of strengthening living standards around the world.

In more good news, China’s leaders recognize this interdependence, as most recently displayed by their constructive steps to address the global economic crisis. In November, China announced a 4 trillion yuan ($586 billion) stimulus package to re-ignite its economic growth. At that same time, China announced that it would lend Pakistan $500 million to avert a balance of payment crisis. Notably, Chinese leaders worked through the established system, encouraging “Pakistan to seek assistance from the IMF first in order to introduce some discipline to economic management.”

China could show even more leadership along these lines, offering funds to more countries, earning more credibility for being a “responsible stakeholder,” and garnering good will from developing and developed countries alike. A partnership with China on addressing the global economic crisis is critical, and ongoing disagreements on issues such as currency should not preclude cooperation and collaboration toward that ultimate goal wherever possible.

In the long run, President Barack Obama will be judged on the whole bilateral relationship, but especially on his ability to bring China into a regime to address global warming. This is the issue that has the potential to define and animate our bilateral relationship. Together, the United States and China account for 40 percent of global emissions. Breaking this inadvertent “suicide pact” is the epic challenge of our era.

That’s why President Obama should waste no time in initiating formal talks with China. He should meet with Chinese President Hu Jintao at the earliest opportunity to signal the importance of China’s relationship to the United States. The Obama administration also should openly address the tensions in our economic relationship, while noting the many positive steps China is taking.

Further, the United States should affirmatively recognize Chinese participation in the so-called Group of 20 summit in April. This forum of leading developed and developing nations seems set to supercede the Group of 8 industrialized nations as the world’s leading global economic forum. Indeed, China’s participation in global economic talks is long overdue.

Winny Chen is a research associate for the Center’s National Security and International Policy Team and a co-author of the Center’s recent report, “A Global Imperative: A Progressive Approach to U.S.-China Relations in the 21st Century.”

Nina Hachigian is a Senior Fellow at the Center and a co-author of  The Next American Century: How the U.S. Can Thrive as Other Powers Rise (Simon & Schuster, 2008).

For more on CAP’s recommendations for China, please see:

 

 

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