China, U.S.: The Strategic Economic Dialogue as a Tool for Managing Relations

By: John_Mauldin

As the forth largest economy in the world, the rapid growth of Communist China' military, and economic prominence has both perplexed and intrigued the United States. Stratfor analyst Rodger Baker addresses the two primary economic concerns troubling Washington and Wall Street alike: the Chinese-U.S. trade imbalance, and the floatation of the renminbi, currently pegged at 7.8 Yuan to the dollar, though allowed to fluctuate 2-3%.

Washington has identified the currency dilemma as the primary obstacle to improved U.S.- Chinese relations, concluding that the removal of the currency peg will not only permit U.S. exports to be more competitive but also shrink the current trade imbalance.

This Stratfor piece is an insightful, objective assessment of our current underlying disputes and their respective political and economic origins, providing suggestive solutions that will permit a more intimate, beneficial, enlightened relationship with China.

George's company Stratfor provides some insightful and comprehensive research on geopolitical events and global affairs. He continues to be generous by offering my readers a discount to his normal subscription rates which can be obtained by clicking here .

I hope you find this article as insightful and enlightening as I have, providing a deeper look into a global relationship pertinent to our prominence and prosperity in the future.

John Mauldin, Editor

China, U.S.: The Strategic Economic Dialogue as a Tool for Managing Relations
By Rodger Baker

Chinese Vice Premier Wu Yi is in Washington to meet with U.S. Treasury Secretary Henry Paulson for the second of the planned biannual Strategic Economic Dialogue (SED) sessions between the two countries. The dialogue brings together representatives of numerous ministries on both sides of the Pacific, covering finance, labor, trade, agriculture and the environment, among others. As the talks get under way, business and media attention is focused almost exclusively on two main issues: the Chinese-U.S. trade imbalance and China's undervaluing of the Yuan.

The dialogue, however, is designed to integrate a much broader array of issues between Beijing and Washington, moving beyond trade to the larger matter of how the world's only remaining superpower deals with the rapid emergence of China on the international economic and political scene. For Washington, the dialogue is a tool to manage China's international relations as much as China's economic development. And for Beijing, the dialogue represents an attempt to shape relations with the United States in terms of economic cooperation, rather than strategic competition.

The economic framework for discussions seems to appeal to both Washington and Beijing, and the current dialogue, then, serves as a convenient tool for managing relations that sit on a much broader geopolitical framework. Still in its early stages, the SED reflects a changing dynamic in the management of U.S.-Chinese relations. From Beijing's perspective, the SED is a way to focus on the potential positive elements of U.S.-Chinese ties -- business and trade -- and reduce attention on questions of the "China threat" and the emergence of China as a military competitor to the United States.

The SED serves, in Beijing's mind, as one way of using the U.S. administration as a balance to the U.S. Congress. If the administration is looking at the broader strategic issues posed by China's global emergence, then it will be less likely to accede to congressional politicking on the China issue -- or so Beijing hopes. China sees the U.S. Congress as "unsophisticated" on China issues, and Capitol Hill as a place where short-term political interests, based to a large degree on electioneering and campaign contributions, drive periodic spurts of anti-Chinese rhetoric. However, during the past two decades, Beijing itself has grown a little more sophisticated in its understanding of U.S. politics, and has moved past dealing primarily with image management at the presidential and ministerial level to trying to shape U.S. political views from the ground up.

With the rapid rise of the Chinese economy in the aftermath of the Asian economic crisis and Beijing's entry into the World Trade Organization, China looked to both protect its growing economic connections and expand its international influence in the post-Cold War environment. With the Soviet Union gone and Europe failing to rise as a counterbalance to the United States, China set its sights on Washington as the biggest challenge to Chinese power -- and yet the best economic path to Chinese growth. Washington was headed for a presidential change, Beijing was dealing with increasing U.S. warnings of the China threat and the Chinese government was looking at its own upcoming leadership transition and the internal battle over best economic policies and security posture. For each of these issues, managing relations with the United States became the critical common factor.

In the late 1990s, Beijing ramped up a program of perception management in Washington, moving from trying to buy influence through campaign contributions to a more subtle approach of accelerating political and economic dialogue with U.S.-based think tanks, research institutes and academic institutions. Chinese scholars, both in the academic fields and in semi-government research institutes, embarked on numerous exchanges, dialogues and forums, sharing insights into policy debates and internal economic inconsistencies in China. At the same time, the state began releasing economic statistics that, through close examination, painted a picture not of a strong and unbreakable China, but of one that faced many of the same economic challenges and potential pitfalls as its Asian neighbors.

Through a carefully managed spread of information, China began shaping the perception of the key U.S. researchers on Chinese issues. Beijing seemed more open, more willing to admit mistakes and more receptive to suggestions for economic, social and even limited political reform. Discussions of the China threat shifted from a military concern to one of economics to one of potential Chinese collapse -- and the attendant ripples that would affect the international (and U.S.) economic systems. This information began trickling up to congressional aides, members of Congress and into the U.S. government bureaucracy and administration.

And Beijing is seeing a payoff, at least on the surface. When the current administration took power, relations with Washington were contentious to say the least. U.S. President George W. Bush came into office with a Cabinet that viewed China as the next strategic threat now that the Soviet Union was relegated to history. China's economic rise, and its military expansion that focused on new missiles and naval technology, was seen as a challenge to U.S. dominance of the seas, and thus to U.S. core national security. Now, the administration is pursuing strategic dialogue and cooperation with China, even if this is just a stopgap measure until Washington can free itself from Iraq.

In 2001, after the 9/11 attacks, Washington and Beijing came to a working arrangement. The United States would essentially leave China alone, and China would not present any direct challenge to the United States as Washington dealt with what it saw as a new strategic threat: al Qaeda and international Islamist militancy. Beijing welcomed the reprieve from the more contentious relations with Washington, which had declined precipitously following the collision that left a U.S. reconnaissance aircraft on a military runway in southern China.

At the time, Beijing was neither militarily nor politically prepared to square off against the United States. In fact, China was facing a major generational shift in leadership and needed the external buffer to allow Beijing to focus on internal issues. With the political transition completed, Beijing then shifted focus to economic and social stability -- and again used the minimal external pressure from Washington to give it breathing room while these issues took priority.

Internationally, Beijing used the 2003 U.S. invasion of Iraq and the North Korean nuclear crisis to try to raise the profile of international organizations such as the United Nations to counter the unipolar power of the United States. At the same time, it tried to raise China's profile and importance to Washington -- since, after all, the U.S. government could not face off against al Qaeda, Afghanistan, Iraq and North Korea all at the same time.

By 2005, Washington was looking at longer-term involvement in Iraq than it had planned, and then-U.S. Deputy Secretary of State Robert Zoellick made an indirect offer to Beijing for closer potential cooperation -- offering to treat China as a global player if Beijing proved a "responsible stakeholder." The offer appealed to Beijing, and China, cautiously at first but with increasing boldness, launched into a more open dialogue with Washington, making token trades on currency issues and offering its services in "rogue" nations such as North Korea and, more recently, Sudan in order to demonstrate its "responsibility" and keep real pressure from the United states to a minimum.

While the U.S. administration, particularly the Pentagon, was not all that reassured by China's behavioral change (as seen in early 2006 with a series of reports labeling China a strategic threat and culminating in a several-minute-long tirade by a Falun Gong activist at the White House reception for Chinese President Hu Jintao), Washington, with the exception of Congress, has taken a relatively relaxed approach to China. Trade issues dominate the headlines, as does the yuan valuation, but the administration pushes for more cooperative dialogue with Beijing rather than punitive sanctions or tariffs.

On Beijing's side, shortly after the first SED meeting in December 2006, China's Foreign Ministry launched the Center for China-U.S. Relations Studies at its research institute, the China Institute for International Studies. The center is designed to bring together top Chinese scholars on U.S. issues from across a broad spectrum of China (economic, international relations, security and others) and encourage increased exchanges with counterparts in the United States -- thus managing the perception campaign from a unified center. Earlier this year, China also appointed Yang Jiechi as foreign minister, calling on Yang's years of experience in the Chinese Embassy in Washington, his work with both sides of Congress and his long-standing ties with the Bush family.

The SED, then, provides both Washington and Beijing with a more centralized (and less random) point of contact for managing bilateral relations. But management and fundamental alterations are very different things. China's trade and economic policies will not be set with Washington's concerns as the top priority. Beijing's first concern is the maintenance of Communist Party rule, followed closely by the maintenance of social stability (which allows the party to remain in power). Economics are a tool, one that must balance domestic social pressures with international concerns. Furthermore, while dialogue can provide a channel for managing relations with the United States, China is not abandoning other tools for preserving its increasing economic vulnerabilities as its trade and energy requirements are internationalized.

China's anti-satellite weapons (ASAT) test in January was a clear reminder that China still sees the United States as the top challenge to Chinese economic security. China is a land power, not a maritime power. But China's economics have grown increasingly linked to longer and longer supply lines, particularly with energy imports. As such, Beijing sees a major vulnerability in its supply routes, as a large portion of its energy must pass through waters that, for all intents and purposes, are controlled by the United States. The ASAT test was intended to notify Washington that Beijing has ways to deal with the U.S. strategic dominance of the seas by threatening critical U.S. communications and guidance infrastructure.

China's vulnerabilities as a land power increasingly dependent on sea routes makes Beijing always extremely nervous about the United States, regardless of whether Washington intends to interdict Chinese trade and energy supplies. At the same time, China's expanding trade and political links around the globe are starting to rub up against U.S. strategic interests, particularly where China taps into energy resources Washington wants, or where Beijing's relations in places like Africa and Latin America challenge U.S. access to raw materials. But economic competition notwithstanding, Washington is loath to directly confront China, as attacking a land power in Asia is never wise or easy.

There is a standoff, then, between Washington and Beijing. Washington is heavily occupied with Iraq and Iran, and Beijing is taking advantage of this to expand its political and economic ties as broadly as possible. At the same time, China is obsessed with internal economic and social instability, and Washington can use these concerns to needle Beijing and keep China from taking too much advantage of Washington's limited bandwidth. Both see the SED as a useful place to manage this dance. Neither sees the SED as a real forum for a strategic partnership between China and the United States, or a place for drastic changes in the relationship.

There is something beyond the SED, however, that could start bringing Washington and Beijing closer together: the re-emergence of Moscow.

Relations between Washington and Beijing have been rather manic since the establishment of the People's Republic of China in 1949. After Beijing's initial flirtations with Washington, China and the United States soon found themselves facing one another on the battlefields of Korea. China's ally at the time, the Soviet Union, largely sat out the conflict, leaving Beijing to ensure the communist revolution in Asia -- and letting China fight the United States while Moscow avoided the potential World War III feared by U.S. strategists at the time. Rather than using the opportunity presented by the Korean War to launch a simultaneous assault on Europe, Moscow let China fight, undermining the potential for any Sino-U.S. relations and tying China closer into the Soviet sphere of influence.

But by the late 1960s, tensions between Beijing and Moscow had risen to a fevered level, and significant border clashes broke out in 1969. Three years later, the mutually perceived threat from the Soviet Union brought U.S. President Richard Nixon to China to meet with Mao Zedong. The United States and China embarked on a new strategic relationship based on balancing the Soviet threat. This lasted until shortly after the collapse of the Soviet Union, when China began seeking to expand its influence in East Asia and looked as though it were getting much more serious about war with Taiwan. In the late 1990s, China even flirted with the idea of establishing a strategic partnership with Russia to block the unipolar power of the United States, but never quite trusted its northern neighbor (and, for a while, Moscow had little to offer anyway aside from arms sales, which were already taking place). When 2001 rolled around, Beijing found new opportunities to deal directly with Washington.

But Russia has begun reasserting its influence around its periphery, and Cold War rhetoric is flowing from Moscow. On the surface, that would seem ideal for China, except that Beijing has been looking at Central Asia as a critical piece of its energy security puzzle, since Central Asian energy supplies never need to move by sea to China. As Moscow seeks to reclaim influence and control in its near abroad, China sees its potential role in Central Asia diminishing and its energy supplies challenged by the resurgent Russia. Add in Russian talk of reinvigorating the Russian presence in the Pacific, and China sees its energy and economic security once again challenged by its neighbor.

This could provide the impetus for a Beijing move closer to Washington -- to keep the United States focused on Russian threats rather than Chinese concerns. Beijing already has experience working with the United States to counter Russian influence, and keeping the current and former superpowers eyeing each other leaves China a less visible threat, and thus capable of continuing to deal with its own internal issues while facing minimal pressure from outside. As Beijing sees it, if a true multipolar world cannot be established any time soon, the hints of a return to a bipolar world order -- with Russia facing off against the United States -- could keep China out of the crosshairs and constrain U.S. actions. With the SED already in place, China has another pathway through which to shape its own image as cooperative, and perhaps drop a few hints of its concerns about Russia.

Your always finding China fascinating analyst,

By John Mauldin
Frontlinethoughts.com

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John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staff at Millennium Wave Advisors, LLC may or may not have investments in any funds cited above. Mauldin can be reached at 800-829-7273.

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