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No Need to Be Obsequious in Beijing…

Obama’s Trip to China
16 November 2009

by Daniel Michaeli

A good reality check today from Steve Dunaway on the true balance of leverage between China and the United States.

The popular narrative in the United States is that President Obama has little leverage in Beijing to push President Hu in areas like its currency peg, Iran and North Korea, or even human rights. But the real story is more complicated, as always.

Can China, as “banker” to the United States, threaten the U.S. with withdrawing support for the U.S. national debt? Chinese officials recently have been busy criticizing U.S. economic policies: the dollar’s depreciation combined with the Federal Reserve’s policy of low interest rates creates “new, real and insurmountable risks to the recovery of the global economy,” and U.S. demands for China to allow the Renminbi to appreciate are “not conducive to a global economic recovery and not fair.”

Steve argues–and perhaps he is a bit too cavalier about this–that even if China were to stop buying U.S. treasury bills, others would buy them at only marginally higher interest rates. A stronger argument here is that China is unwilling to make sudden moves that would harm its massive $2 trillion-plus in foreign exchange reserves.

Of course, there is another key factor, which Steve mentions: a Chinese shift away from U.S. dollar-denominated debt would actually make American exports more competitive around the world. Either China accumulates less in reserves by allowing the Renminbi to appreciate, which makes the Chinese market more accessible for American exporters; or China puts its money elsewhere, like Europe, which would make U.S. exports to Europe more competitive.

The U.S. agenda with China is bound to be crowded, as one would expect in a broad relationship between two economic superpowers. Primary issues include global economic rebalancing, Afghanistan-Pakistan, North Korea, and Iran, and also climate change and problems of mistrust/miscalculation between the American and Chinese militaries. The bottom line is that there are many areas in which American pressure on China has been productive in the past and can be productive in the future. The president can and should be assertive about the need for China to act in ways befitting a responsible rising power.

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