Mon, Dec 08, 2008 - Page 8 News List

Obama faces China’s challenge

By Sushil Seth

There is palpable anxiety in Beijing about the direction of US-China relations under US president-elect Barack Obama. It was apparent in Chinese President Hu Jintao’s (胡錦濤) remarks at the APEC conference in Lima, Peru. He said that he was hoping Obama would recognize the importance of US-China ties, while treading carefully on the thorny issue of Taiwan.

From Beijing’s viewpoint, US President George W. Bush’s administration created conditions for China to loom large on the international stage.With the spy plane incident and Bush’s tough remarks on the US commitment to defend Taiwan with whatever it takes, however, its start was a bit rocky.

But it didn’t take long for the bilateral relationship to recover. Indeed, the US’ China policy became a hostage, more or less, to a few key issues. The most important, of course, was the global war on terror, where China’s broad support was greatly welcome.

The second issue was North Korea’s nuclear proliferation, where Beijing-sponsored six-party talks became the venue for any worthwhile progress.

The third issue has been Iran’s nuclear ambitions, where Beijing hasn’t been as supportive, but has been willing to go along, short of confronting Iran.

The upshot of it all is that with the US mired in the Middle East, and the North Korean imbroglio far from resolved, China never had it so good in promoting and projecting its image of international respectability.

As the Bush administration is nearing its end, the US is now plunged into an economic crisis that could be the worst since the 1930s depression.

Obama has said the US is facing “an economic crisis of historic proportions.” He will now have the difficult task of restoring both the US’ international image and bailing out its ailing economy.

In some ways these are related problems. For instance, the US military operations in Iraq and Afghanistan have been increasingly contributing to the US budget deficit. Some estimates put the US war-related expenditures between US$2 trillion and US$3 trillion.

Therefore, any winding down of US military operations in Iraq and Afghanistan (the latter might prove more intractable) would not only have a beneficial effect on the US economy, but also give Washington more flexibility to deal with challenges to its international supremacy — like the one from China’s enhanced position.

One important area of discord between Washington and Beijing is likely to be the US’ ballooning trade deficit with China. China’s foreign currency reserves, largely from trade surpluses with the US, are now approaching US$2 trillion. Much of it is invested in US Treasury bonds.

With the Democratic Party controlling the presidency and the Congress, and the US in deep economic crisis, the demand within the country for a significant correction of its unsustainable trade deficit with China is likely to become louder and shriller.

It will take two forms. First, protectionist sentiment in the US will rise, with China accused of indulging in unfair trade practices.

Second, China will be under greater US pressure to revalue its currency. China’s currency is under-valued to make its exports cheaper, flooding the US market.

As James Fallows wrote in The Atlantic, “Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus … that the Chinese government has mostly parked in the U.S. Treasury notes.”

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