Top Risk #1 — Turbulence in U.S.-Chinese relations

By Ian Bremmer and David Gordon

Today, we begin with our top risk for 2010 — a serious spike in tensions in what has become the world’s most important bilateral relationship.

The G2 was a stillborn idea, because Beijing doesn’t want the responsibilities, even though the United States pushed hard for this framework at the Obama-Hu Jintao summit in November. That won’t last in 2010. In the future, we’ll look back at that summit as the peak of the relationship, and we’ll see significant deterioration in U.S.-Chinese relations in the coming year.

The problem isn’t Obama or Hu; both want to avoid ruffling feathers. But there are too many structural pressures for it to last. The United States is looking for more (and more responsible) international leadership from the Chinese — stakeholdership continues to be the mantra in policy circles. But as clearly evidenced on climate change during the Copenhagen summit, the Chinese have little national interest in taking a lead role. In 2010, we’ll see this trend also play out on nuclear proliferation, reform of rules of the road for international trade and commerce, cyber-security, and security in Afghanistan, Iraq, and beyond.

For Beijing, economic partnership with the United States looks a lot less attractive than it did just a couple of years ago. But China’s top leadership recognizes that it has little choice for the near term, which is why they are taking their time in building domestic demand and instead doing everything possible to maintain its share of global export markets. That means continuing domestic stimulus for the economy and tight controls over the exchange rate of the yuan. It also means a growing role for the state as lead actor and arbiter of the Chinese economy, and growing support for “national champion” Chinese firms, both at home and abroad.

With the uptick in domestic protections against Chinese exports (steel, tire tariffs), we’re just starting to see an American backlash to this Beijing response. The argument runs as follows: Domestic industry subsidies and fixed yuan/dollar peg have allowed the Chinese government to draw wealth away from the U.S. economy by allowing its export-focused industries to sell to the American consumer for artificially cheapened prices. By that logic, China hasn’t just been a free rider in the international system

… but more directly on the U.S. economy. Therefore, China’s plans for its immediate economic future are fundamentally incompatible with the vision of “global rebalancing” as laid out by Larry Summers and other Obama administration officials. This is the crux of the tension in the U.S.-China relationship — by way of protectionist policies and slower consumer spending, the United States is rejecting China’s development model.

In 2010, a mid-term election year with high unemployment, labor and even some industry groups will lead the Obama administration to send the message that China’s economic policies cannot persist and will lay down the gauntlet with more tariffs on Chinese exports. We’ll see more intense politicizing of exchange rate policy (especially absent a significant rise in the yuan); investment policy tensions both in the United States (CFIUS) and in China (greater state preferences for local firms); China-bashing when Obama pushes cap and trade in the Senate; growing trade tensions (especially on steel); and issues involving cyber-security. And if any new “product safety” scandal emerges involving Chinese manufactured goods in the middle of those tensions, we’ll also see a populist American push against goods “made in China.”

A recent Pew-CFR survey reported that 44% of Americans believe China is now the “world’s leading economic power.” Just 27% say it’s the United States. In 2008, we saw the last U.S. presidential election in which the overwhelming majority of voters didn’t know or care where the candidates stand on China. The shift begins this year.

Tomorrow, top risk #2 … Iran.

Ian Bremmer is president of Eurasia Group. David Gordon is the firm’s director of research.

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