Five Things Obama Should Do in China

As Barack Obama arrives in Beijing, he faces a different reality in China than either Bill Clinton or George W. Bush did at the start of their presidencies. Many commentators have remarked that, with Chinese purchases of U.S. Treasuries now crucial for funding the U.S. budget deficit, China has become America’s banker. But this is only half the story: Today, these two giants are now more dependent on each other than ever before.

In the short term, a reinvigorated American economy is critical for China to re-energize its listless export sector and protect its trillions of dollar-denominated investments. And in the longer term, a fundamental restructuring of the bilateral relationship is crucial. Economic and environmental issues have pushed to the top of the agenda, moving ahead of traditionally flammable subjects like Taiwan, Tibet, and human rights.

The U.S. president will not lack for challenges to tackle in China. The five most difficult issues he faces include open markets, energy and climate change, military ties, currency, and yes, those touchy issues of Taiwan, Tibet, and China’s treatment of its own people.

1. Open Markets

Obama won himself few friends in Beijing when he imposed 35 percent tariffs on the import of low-end Chinese tires in September, and his administration’s  preliminary decision to implement tariffs on Chinese steel pipe this month didn’t help much either.

Yet the headlines screaming "trade war" may have been premature. China thus far has been disciplined in confining retaliation to the World Trade Organization’s dispute resolution mechanisms. Its initial moves against the US poultry and auto industries have followed WTO procedures, although the business community is maintaining a wait-and-see attitude.

These U.S. decisions make convincing China that Obama is fully committed to free and open markets tougher. He knows Chinese markets – China’s economy is set to grow by 8.5 percent this year and 9 percent in 2010 — are some of the few in the world seeing rapid growth. But he will face a skeptical audience as he works to open Chinese markets for U.S. businesses, which would mean jobs and profits for America.

Conversely, China needs to show it is truly committed to fair competition. Lax intellectual property rights enforcement on everything from pharmaceuticals to software threatens U.S. companies in China, while stifling innovation by both Chinese and American firms. And Chinese technical specification restrictions on products, such as for information and communications technology, often appear to be designed to keep out U.S. competition.

2. Energy and Climate Change         

It’s now clear that Obama’s original visions of hard carbon emission caps for China — and the United States — will not happen before this year’s Copenhagen climate-change conference in December. Nevertheless, Obama may need at least symbolic commitments from his Chinese counterparts to bring blue dog Democrats on board for the pending cap-and-trade legislation — much less the GOP. His scaled-back goal should be a framework for negotiation with the Chinese.

Despite well-documented problems, China has made serious strides on the environment in recent years. Its top-down legislature has quickly moved forward on a host of positive environmental priorities. These include rapidly growing its wind and solar energy sectors and expanding its clean gases buses in Beijing, the largest fleet in the world. But the biggest problem remains that reducing the expansion of carbon emissions is far different from reducing actual emissions.

3. Closer Military-to-Military Ties

U.S. military ties with Beijing have become a necessity for both sides. Military-to-military contact builds familiarity, reduces the chance for misinterpretation of actions, and promotes shared strategic objectives.

President Obama continues to seek China’s cooperation in fighting terrorism, much as the Bush administration did. Perhaps even more importantly, the Obama administration is also looking for help dealing with North Korea and pushing forward a robust nonproliferation plan to tackle potentially difficult situations in countries like Pakistan.

Nonetheless, the Obama administration has serious concerns about the transparency of China’s rapidly growing military budget, while Beijing has expressed irritation at some American surveillance activity and missile sales to Taiwan. When problems arise in the latter two areas, Beijing has tended to break off contact, resulting in what U.S. Secretary of Defense Robert Gates refers to as "on-again, off-again" relations. Obama’s task here will be to develop a more durable framework for military engagement.

4. Currency and Deficits

The U.S.-China trade imbalance has caused significant tension over the years. To finance its trade surplus, China underwrites Washington’s deficit spending through vast holdings of U.S. dollars, making the skyrocketing U.S. deficit a point of contention. In turn, the United States continues to pressure China to move towards a more freely floating currency. In the year and a half before the Olympics, the Chinese renminbi appreciated about 20 percent against the U.S. dollar — but has since frozen in its tracks.

Yet three factors will push both sides toward pragmatism. First, the huge increase in the U.S.-China trade deficit has primarily replaced those that have closed with other East Asian countries; the U.S. trade deficit with the region isn’t greater than it was before, it’s just allocated differently. Second, although U.S. spending deficits cause China anxiety, Beijing holds far too many dollars to start a selloff without destroying its own economy. Third, the recent U.S. dollar slump has pulled the Chinese renminbi down with it. Thus, China’s currency policy affects the European Union, Japan, and other countries far more than it does the United States.

The two countries understand one another on these issues, even if they don’t fully see eye to eye. Obama does have constituencies — such as U.S. manufacturers who complain that China’s is manipulating its currency to compete unfairly — clambering for tough talk, as do the Chinese. Even more important than domestic political considerations, though, China and the United States will need to figure out a way to reduce global trade imbalances, thus easing long-term downward pressure on the dollar. Americans are already consuming less and saving more, but this will need to be sustainable with China also figuring out how its citizens can pick up the purchasing slack — a goal the government has already acknowledged.

5. Traditional Sticking Points

U.S. Secretary of State Hillary Clinton sent a clear signal about the Obama administration’s stance on Tibet, Taiwan, and human rights during her Asia swing in February when she told reporters, "Successive administrations and Chinese governments have been poised back and forth on these issues, and we have to continue to press them. But our pressing on those issues can’t interfere with the global economic crisis, the global climate change crisis and the security crisis."

While many American groups may not be pleased with the approach, don’t expect to hear the fiery public rhetoric of previous administrations. Obama may still press Beijing on these topics, but he favors quiet diplomacy, which often works better when dealing with China.

Big Picture

For President Obama, his first China visit is full of challenges, but is critically important. China is arguably America’s most important economic partner at a time when the economy looms larger than any other issue. The ability of U.S. firms to tap into China’s market potential will impact the U.S. economy in the short and long terms. And this may be his last opportunity to make progress on carbon emissions negotiations ahead of the critical Copenhagen climate change talks. Throw in his military and nonproliferation agenda and President Obama’s four days in China promise to be busy indeed.