Exclusive: To Appease China, Obama Administration Accepts Empty Rhetoric

by WILLIAM R. HAWKINS April 13, 2010
In advance of the arrival of Chinese President Hu Jintao in Washington for the Nuclear Security Summit, both his government and that of President Barack Obama tried to push the problem of Beijing’s currency manipulation and trade surplus to the side so to calm tensions. The Obama administration’s penchant for “dialogue” fits Hu’s needs. The Chinese know that talk is a substitute for action, so as long as they say the right things, they don’t have to actually change anything they are doing. Washington will eagerly accept the slightest sign of “progress” as if it were a solution, thus avoiding a confrontation. The mood is truly “peace at any price” at the White House.
 
Pressure in Congress has been mounting for action against Chinese predatory trade tactics, but that is not the only issue in play. Beijing continues to provide diplomatic support to Iran even as Tehran takes more open steps towards acquiring nuclear weapons. Hu’s regime has blamed the United States for escalating tensions on both issues, and pushing for actions which Beijing rejects.
 
To appease China before the Washington summit, the Treasury Department delayed issuing a report on currency manipulation that was due April 15th. Treasury Secretary Timothy Geithner then made a surprise trip to Beijing on April 7th offering what Business Week called “an olive branch.” A terse Treasury statement after the meeting with Vice Premier Wang Qishan noted only that the two men “exchanged views on U.S.-China economic relations” with no announcement of any progress.
 
The day after the Geithner-Wang meeting, Zhu Baoliang, chief economist at the State Information Center, a think-tank linked to the National Development and Reform Commission (China's central planning agency), said that a major revaluation of the Yuan currency was not likely. The Yuan might be allowed to trade within a wider band, but the result would only be, at most, a 3 percent rise by October. China’s exchange rate is estimated to be undervalues by 30-40 percent, so such a small change would not affect trade flows – which is the point. Beijing wants to look flexible without reducing in any way its trade surplus which supports economic growth and job creation.
 
Being a centrally planned model of “state capitalism,” Beijing can use other methods to provide its friends on Wall Street and in Washington with talking points against actions that could cripple its aggressive trade strategy. The General Administration of Customs suddenly reported last week that China ran a trade deficit in March. How could this be? It wasn’t due to a drop in exports, which the GAC reported were up 24.3 percent year on year. The cause was a massive 66 percent increase in imports, just enough to produce a $7 billion deficit for the month. China was amassing commodities for future use, timed to create a stir before the summit. The GAC still expects China to run a large trade surplus for the year, with exports growing 10-15 percent.
 
What is interesting in the GAC report is a reference to a 10 percent trade deficit as being an “alarm level” which March’s deficit did not approach. The U.S. trade gap in 2009 was 24 percent, and, before the recession reduced trade, was 38 percent in 2008. The alarm bells should be deafening all across America.
 
China’s state-run media has taken a hard line on the currency issue, and has linked it to the Iran nuclear issue. The Communist Party newspaper Global Times stated in an April 8th commentary entitled ominously, “Yuan pressure could result in mutual destruction.”
 
After all, the intertwined interests and mutual dependence between the two powers are much greater than five years ago, and China, especially after the global financial crisis, is in a stronger position.
 
The US needs China's cooperation on many global issues, which is one reason why it will not act rashly on the currency issue. Chinese President Hu Jintao's decision to attend Washington DC's global nuclear summit has made outsiders believe that the two powers have reached a certain understanding on currency issue and the Iranian nuclear issue. If the US fights with China over the Yuan, Obama's goals of a nuclear-free world and non-proliferation targets may come to nothing.
 
An editorial in the same publication April 6th editorial argued,
 
Tension between China and the US was temporarily relieved Saturday when the US Department of Treasury delayed releasing a report on the exchange rates of the country's major trading partners.
 
We hope the decision signals a real adjustment of US policy toward the Yuan, or at least the start of a move in that direction. It should not be a stall tactic in exchange for China's support on concerns such as the Iranian nuclear issue.
 
But the connection is misleading, as Chinese diplomats are well aware. The argument that the U.S. cannot push China on trade, no matter how many American jobs are lost or how much Chinese capabilities are improved, because of Beijing’s ties to Iran (and North Korea) is old and invalid. Major negotiations have been going on since 2003, during which both Tehran and Pyongyang have made steady progress in their weapons programs. China has shielded them from crippling sanctions and other actions that could threaten their regimes or programs. Beijing has shown no sign of changing its policy of protecting these rogue states. Meanwhile, the U.S. has allowed its trade deficit with China to double. A “win-win” for Beijing and a “lose-lose” for Washington.
 
Beijing may make some encouraging sounds on Iran to deflect criticism, but it will not allow anything to be done at the UN or elsewhere that will actually change the situation on the ground. Anything done about Iran will be like the possible 3 percent Yuan revaluation, good for a press release but not good for achieving U.S. policy objectives. China believes it is in the stronger position because it knows what it wants and will act to protect its interests, while Washington will not. China’s material strength is markedly less than America’s, but its leadership is stronger.
 
FamilySecurityMatters.org Contributing Editor William R. Hawkins is a consultant specializing in international economic and national security issues. He is a former economics professor and Republican Congressional staff member.

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