In between two giants

15 Dec

Writer’s note: my first analytical feature

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What new US-China relationship means to the rest of the world  

“If your grandmother was still alive, she would not believe what I saw there,” my mother exclaimed after her visit to my grandmother’s hometown in
China last year. The poor village she escaped from 60 years ago has become prosperous. The small slippery mountain pathway she took to collect the heavy firewood for sale has been replaced with an asphalt road. The wooden old house where she had starved day by day has been replaced by two-storey brick house. They do not even need firewood anymore; the houses now are warmed by electric heater. “They are so wealthy now.” my mother uttered in amazement.  Surely, my grandmother never imagined that. At that time, who could? 
 

Well, at least US president Richard Nixon could. He recognised China’s importance and started their relationship by the famous ping-pong diplomacy in 1970s. The political tie had remained cold and full of distrust, weathered through largely due to economic interest. But as China’s economy has grow stronger and the trade value grown larger, there is growing interest to strengthen it. The US is still the largest world producer, accounting for 28% of world GDP, but with growth of 3% or less. China, growing at 10% rate yearly, currently only contributed 5% to the world GDP last year. But, at this rate, China would overtake the US by 2035, global investment bank Goldman Sachs predicted. Both realised that they could either be friends to share the ‘world pie’ or foes for the doom of the both and the world.  

As such, they recently agreed to hold cabinet-level meetings to decipher their differences at the top economic and foreign policy making. Their main discussion is unavoidably on the gluing aspect: trade. There are several issues that yet to be resolved. The first is value of Chinese currency renminbi (RMB). United States demanded China to let RMB to fluctuate more freely. The presumably undervalued RMB is argued to cause unfair trade. It makes Chinese goods unfairly cheap in the US market and reduces American companies’ competitiveness.  

However, some experts argued that cheap RMB is actually good to reduce inflation. Even if American consumers do not buy China products, they will end up buying slightly more expensive products from other countries like Thailand, India or Indonesia. Moreover, cheap China products force other countries to be more competitive, bringing the overall price further down. In this case, cheap RMB helps to limit the inflation in the US and the rest of the world.  In any case, the rising US trade deficit is a growing problem. US consumers’ keenness to consume and sinking ability to export has caused more than $725 billion deficit last year, almost 18% increase from 2004. A quarter of the deficit was with China, which actually a consistent proportion since 1990s.

To finance the debts, Washington has been issuing bonds. They can be purchased by foreign countries as foreign reserved. China has become US second largest creditor after Japan by invested $1 trillion of foreign reserve in US dollar. This put them at an entangled situation. US need to make sure China will not significantly reduce or pull out its credit, as this will destabilize dollar value.

On the other hand, China need to make sure that US economy can maintain its dollar value. Any negative movement from each side will endanger other countries’ foreign reserve and economy.   However if the trade deficit keeps growing at current level, eventually US economy will not be able to sustain its debts. Economy will slowdown and US dollar value may fall. With so much US dollar on hand, China is clearly in the interest to help the US to balance its trade. Also, low demands from US consumers will slowdown the China export, damping its growth. How can China help US economy?

One way is by helping US to increase its export to China. China’s 1.2 billion people is a fat market and is expanding swiftly as the people get richer. Real consumer spending has grown by 80% in past six years. With its manufacturing competitiveness failing, Washington keens to play on its strength in service and financial sectors. It demands China to open up these underdeveloped markets for international investors. This is a particularly difficult negotiation because of China’s protectionist approach. However, Washington may be able to put more pressure as the deadline for China to fulfil its WTO membership requirement to liberalise its markets draw closer. If the US gets what it wants, this will be good news for countries where financial sectors are strong, such as the US, the UK, and Singapore.

China can also more seriously help securing US income from its intellectual property industries. These industries contribute to more than half of US export and two-fifths of US economic growth. Even though Chinese government has imposed tougher rules, the implementation at local governments is still lenient. Counterfeit goods from computer software to designer bag are still openly sold even at roadside stalls. Then again, the pricing of US products are so high that they are barely affordable by average Chinese. The high price is also mounting the demand for counterfeit products. Unless significant give and take is negotiated, this issue is difficult to be solved in near future.

In turn, China has been promoting its image of peaceful rise. It signed treaty of amity with Association of South-Asian Nations and supported a Central Asia security forum. It also has played the central role in North Korea nuclear armament negotiations including the one after North Korea’s nuclear test in October. That greatly reduced the pressure on the overstretched overseas US army and managed to keep the relative peacefulness in Asia.

A flashpoint, though, is Taiwan. Beijing and Washington have cautiously manoeuvred around this subject. As China develops its ties with other countries, Taiwan is becoming more isolated from international arena. Yet, Taiwan itself is in need of China for yearly $75 billion dollars export. Taiwan president Chen Shui Bian has also committed to the US not to pursue independent from China. Unless there is a radical change in leadership in Taiwan or China, it is unlikely that the situation will change in near future. The tension between China and the US can be temporarily avoided.

Even so, Washington is still increasingly wary of Chinese growing military power and more so of its secrecy. Last year, US ex-defense secretary Donald Rumsfeld accused China of understating its military budget, as much as one-third the estimated $90 billion. China, however, strongly declined such concern. Sha Zukang, China’s ambassador to the United Nations said, “If you read China’s 5,000-year-long history, it’s not difficult to discover that China basically is a peace-loving nation”. Yet, China’s future ambition is still unpredictable. Will it look for only for economic power without seeking hegemony or will it challenge US’s ideology?

The nearer uncertainty, however, comes from the US. The support for free trade, promoted during Clinton era and enhanced during Bush administrations, is getting more divided. There are always winners and losers in free trade. The winners such as big American corporations, which in turn are the donors for the political parties, are delighted by free trade. But, there is growing skepticism about it among the losers. The middle class Americans are increasingly impatient with the stagnant wage and the move of jobs overseas. Democratic Party is finding more socialist voices inside it. Unless the politicians find the ways to nurture the spirit of free trade while safeguarding the losers, protectionism voices may get louder and they may get the upper wind in the next president election in 2008. In that case, it may put strain to US relationship with China and other countries.

However, with current inter-dependency, whoever the next American election winner, it is unlikely for Washington to put any drastic change of approach toward China.So far, relationship of the two giants seems to be going on the safe direction. The two countries are striving to get richer together and along the way pulling the rest of the world with them. But, China’s growing presence internationally is something that Washington definitely keeps an eye on. For now, the rest of the world can only hope that there will be no conflict too large to be contained by the enmeshed trade liaison.  

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2 Responses to “In between two giants”

  1. Doris December 19, 2006 at 1:03 am #

    hey, I think this will be one of the first essays in our class!
    and it is so in your style. I like it! and…I really admire your rational flow in critical thinking~!

  2. Aletta December 20, 2006 at 12:32 am #

    I love your intro!

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