Obama’s China street-cred is Nixonian (but not what you think)

By Phil Levy

Perhaps the most striking aspect of this week’s Strategic and Economic Dialogue between top U.S. and Chinese officials is how amicable and sedate it has been. The Washington Post described how Chinese officials heard "soothing words of reassurance" in lieu of the traditional litany of currency and trade complaints. Secretary Clinton acknowledged that there may not have been a lot of concrete achievements, but said the talks laid the groundwork for closer ties. Meanwhile, the Chinese currency remained roughly fixed against the dollar, just as it has been since last summer.

Had this been a Bush Strategic Economic Dialogue, one could have expected howls of outrage: The American worker is being sold out! When will the administration get tough? Don’t they know what has happened to manufacturing employment? Let’s pass a law and force their hand! I suspect a McCain administration would have been similarly attacked. Indeed, it is a sign of how far Sino-American relations have come that a U.S. leader on the left now enjoys an advantage over his right-wing counterparts in the eyes of most Americans when negotiating economic issues with China.

Just think back almost forty years ago to how Nixon was uniquely positioned to open relations with the People’s Republic. The issue then was whether a president who made such an overture would be seen as soft on communism. As an ardent and well-established anti-communist, Nixon was relatively immune to such attacks. In the same way, Obama is now relatively immune to attacks that he is soft on China’s currency. He’s not lacking in his desire to bring change, and of course, he’s not doing any better in delivering it. He’s just more credible when he says he can’t.

To be sure, there were some grumbles even for the Obama team. Simon Johnson writes:

The US should put on the table the possibility of more assertively taking China to the World Trade Organization over its fundamentally undervalued exchange rate and associated trade policies … The Treasury apparently thinks it should be deferential and on the defensive vis-a-vis China. This is not only bad economics, this is bad geopolitical strategy.

The economic arguments for a reorientation of the Chinese economy and an appreciation of China’s currency are compelling and are qualitatively the same as they have been for several years. China’s current economic path is unsustainable. The day of reckoning has only been brought closer by China’s recent approach to stimulus through wild bank lending. As Derek Scissors puts it: "China’s economic policies have shifted from being unsustainable over the very long term to being unsustainable for any more than one year."

So why not threaten and abuse the Chinese until they push their currency up by 20 percent? That would encourage Chinese consumers to buy up newly-cheap imports and would help reverse China’s astonishing surpluses and reserve accumulation.

The answer: because there’s no sign it would work. For the Chinese leadership, this is their paramount domestic issue. Their legitimacy rests heavily upon a record of economic success. A wrenching and sudden economic shock, of the sort that would come with a large appreciation, would threaten to flood the streets of southern China with aggrieved, unemployed workers. On the other hand, a gradual appreciation of the currency would threaten to flood China with inflows of hot money as global investors perceive a guaranteed return. None of China’s choices look particularly appealing, but it is the central domestic issue they need to fix.

To draw a parallel, imagine that the Chinese delegation had arrived in Washington this week and issued an ultimatum: Obama must set aside plans for expanding health care coverage, and whatever savings or increased revenue he can muster should be used to pare down unsustainable federal budget deficits. The Chinese did no such thing, of course. They are vocally worried about U.S. deficit spending, but they are sensible enough to realize that no external threat would deter Obama on this point; his promise to deliver on healthcare is at the core of his political legitimacy.

With similar good sense, Clinton and Geithner opted to build understanding in this week’s S&ED rather than to pick a fight. The rationale is the same as that given in the Bush administration, though, so how does Team Obama avoid getting lambasted as their predecessors did? If anything, recent economic developments make the question more acute: the U.S. labor market is distinctly worse than before, and we are — for the moment — less dependent on the Chinese for financing as the U.S. current account deficit has dipped sharply.

Obama has street-cred on China in a way his predecessor did not. Whenever bilateral talks end and an administration is left extolling the virtues of better mutual understanding, it raises the question of whether diplomatic imperatives trumped advocacy. That was clearly the suspicion in the Bush administration; hence the recurrent attempts at legislation demanding more economic advocacy. In Obama’s case, there is greater confidence among the critics that he has done all he could.

This week culminated six months of "new" diplomacy toward China, and the results look indistinguishable from the old diplomacy. It’s laudable that the two sides are working to better understand each other, but for each, domestic political imperatives still trump the urgings of a foreign partner.