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Beijing blinks first – the currency debate in diplomatic context

The approaching US decision over China’s exchange-rate policy is as much about politics as economics. This column argues that the coming months will define broader Sino-US relations. The good news is that Beijing stepped back this month, avoiding an outright confrontation. The bad news is that this is only round one.

While the US Treasury’s decision on whether to label China a currency manipulator is inevitably political in nature, rarely has it ever been so geopolitically loaded. In previous years, it has mainly been the economic relationship at stake. This time the implications run from Middle Eastern security to nuclear proliferation, and they will do much to define the broader shape of the US-China relationship in the coming years.

The good news is that Washington and Beijing recently seem to have found a carefully choreographed way of stepping back from what would have been a bruising test of strength.

The bad news is that this is only round one.

The structural tensions and strategic mistrust between the US and China have not gone away – and the restraining influences on both sides that once served to keep the relationship in equilibrium have become markedly weaker. Next time, if Beijing doesn’t blink first there is no guarantee that Washington will.

A more assertive China

The global financial crisis shifted the strategic context for the Treasury’s decision significantly. Having emerged as a relative winner from the crisis, Chinese officials believed that they could extract some direct political benefits from their country’s augmented power position. The focus of these efforts has been the US, which holds the key to the Chinese government’s most sensitive domestic issues – Taiwan and Tibet – and continues to shape China’s security environment both regionally and globally. Not only has Beijing pushed for a shift in Washington’s approach to what it now describes as its “core interests”, but it has made it clear that Chinese cooperation on other global security concerns – such as Iran – may only come at a price, if at all. This has been coupled with forceful demonstrations that Beijing is far more willing than ever before to resist international pressure on issues ranging from the Copenhagen climate talks to the environment for overseas investors in China.
Beijing’s perspective on the changing relative strengths of the US and China initially derived from economic facts: the seeming resilience of the Chinese economy, continued US economic fragility, and China’s large stake in US Treasury bills. But at the same time, in its first year, the Obama administration’s China policy tended to feed Beijing’s sense of political entitlement and perceptions of US weakness. Sometimes intended as conciliatory gestures, sometimes just mistakes, the messages coming consistently from Washington were seen in China to reflect a growing US reliance on Chinese assistance.

A statement by US Secretary of State Hillary Clinton during her first Asia trip in February 2009 that Taiwan, Tibet and human rights issues “can't interfere with the global economic crisis, the global climate change crisis, and the security crisis” set the tone. US Treasury Secretary Timothy Geithner’s visit to China in May saw claims in the state media that the days of US “complaint diplomacy” over currency and trade issues were over, and his reassurances that “Chinese assets are very safe” were met with laughter from a combative student audience at Beijing University. Barely a week later, Speaker of the House, Nancy Pelosi, once one of China’s harshest human rights critics, broached the topic in only in the most oblique terms during her visit. The capstone was President Obama’s inaugural trip to China in November, which attracted a wave of criticism in the US and international press. Another gesture to Chinese sensitivities – deferring a presidential meeting with the Dalai Lama in advance of the visit – again produced no reciprocal goodwill on Beijing’s part. Instead, the public diplomacy elements were characterised by tightened conditions. Unlike for previous presidents, Obama’s townhall meeting with students was not broadcast live on Chinese television. Worse, there was a near-absence of deliverable outcomes beyond a lengthy but largely aspirational joint statement.

Neither did any of this grease the wheels on the issues of substance. On the two areas where hopes of soliciting Chinese cooperation were highest, Beijing had instead become the biggest obstacle. On Iran, China was the principal holdout on deepening sanctions at the UN Security Council. And in Copenhagen, China not only took the lead in blocking efforts to reach a serious deal but did so in a manner that raised diplomatic hackles all round – sending junior ministers to represent China in meetings of heads of state, going so far as to engage in literal finger waving in President Obama’s face. The narrative in Beijing, repeated in even cruder form among a chorus of nationalistic “netizens”, was of a weakening American position and a weak US President – to which a stronger China should be more assertive in defending its interests.

The US that can say “no”

The challenge for the US has been acute. How to impress upon Beijing that it is overreaching, which US officials overwhelmingly believe it is, without escalating tensions and derailing cooperation on the wide spectrum of issues on which the two sides share interests? The first step has simply been to push back. 2010 has seen a marked change of tone by the US and a clear drawing of lines on the issues where Beijing’s positions have been most unrealistic. Public US criticism and a marshalling of international pressure over China’s stance on Iran have been accompanied by critical statements by Secretary Clinton on censorship and cyber-security following the Google imbroglio. Even more importantly, President Obama pressed ahead in rapid succession with a package of arms sales to Taiwan and the pre-planned Dalai Lama meeting.

Beijing’s initial response was to threaten sanctions on US companies involved in the sales and to float threats about other acts of economic retaliation, such as a sell-off of Treasury bills, as well as the suspension of cooperation on third country issues. But looming over all of this has been the currency issue – and the April 15th deadline.

Typically, China has been able to rely on certain forces in any given administration, supported by US business, to resist Congressional pressure. Not this time. US lobby groups have made it clear that corporate attitudes are changing quickly, commensurate with worsening conditions for foreign companies in China. Myron Brilliant, senior vice-president for international affairs at the US Chamber of Commerce stated in March: “I don’t think the Chinese government can count on the American business community to be able to push back and block action [on Capitol Hill].” The dilemma has therefore fallen squarely on the shoulders of the administration: play it too hard and risk feeding the increasingly nationalistic forces in China; play it too softly and risk reinforcing the emerging narrative of US weakness, further reducing China’s willingness to be cooperative.

Beijing saw the writing on the wall – in a context where it was doing the administration no favours on any of its priority issues, risking Chinese ire was starting to look like a far better option. And the Chinese government is well aware that – while its capacity to retaliate has grown – it has far more to lose from a trade war and an upsurge in popular nationalism than the US.

The April deadline hence resulted in a flurry of activity to restore calm to the broader relationship – though any climb-down required going well beyond the currency issue itself. Following a visit to Beijing from Deputy Secretary of State James Steinberg and National Security Council Senior Director for Asian Affairs Jeffrey Bader, both sides have taken a series of choreographed steps. President Obama personally welcomed the new Chinese ambassador to the US, Zhang Yesui, reinforcing in a White House meeting the message about developing a “positive relationship” with Beijing and reaffirming the “one-China policy”. Steinberg agreed to make some relatively boilerplate remarks at the US press club to the effect that “the one-China policy…has not changed”, which the Chinese Ministry of Foreign Affairs and official press could welcome as “positive”. China then agreed to join discussions on a new UN Security Council resolution to tighten Iranian sanctions and confirmed President Hu Jintao’s attendance at the Nuclear Security Summit in Washington. Last but not least, China fed out increasing hints that it would move ahead with a currency revaluation – and the Treasury formally announced that it would delay the issuing of its finding until after a series of meetings that will include Secretary Geithner’s April visit to Beijing and the Strategic and Economic Dialogue in May.

Ultimately, it appears that the strong pragmatic strand in Chinese policymaking has won out. It has been Beijing that has needed to do the most backpedalling from a series of publicly assertive positions that outran its capacity to deliver on them. But this was a near miss. The trends that produced it, i.e. popular nationalism; perceptions of growing Chinese power; and the desire both to test its scope and to translate that strength into political rewards, are still on the rise in China. It will become increasingly difficult to separate the currency issue – and the corollary risks to trade – from this broader dynamic.

All sides face challenges here but the most difficult are for Beijing. Its efforts to use China’s newfound power to gain concessions on issues such as defensive arms to Taiwan will continue to come up against strong resistance. And its economic weight within the system is now such that any attempts to free-ride are going to attract heightened criticism, and even the building of countervailing coalitions. Some in China are frustrated, as they see growing power resulting not in tangible political rewards and greater freedom of action but instead mounting international demands. But it will not be helpful for the global system if these frustrations are simply accommodated. Western policymakers must show that China’s best path to power and influence is a greater willingness to act to strengthen the system on which its economic growth depends. This will mean that other paths for China do need to have costs attached to them, as they so nearly did this April. And Chinese policymakers need to find a story to sell to their public that places international prestige and secure economic growth at the heart of their national narrative. Otherwise – though we may have dodged a bullet this time – the stage will still be set for a series of fights from which no side will come out a winner.


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