Wary cooperation: the 2010 China-US Dialogue

The array of issues being discussed this week in Beijing at the second annual China-US Strategic and Economic Dialogue underscores both the need for and the difficulty of cooperation between these pivotal powers. There is no doubt that the Obama administration attaches great importance to the talks. Not only did both Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner make the trip, but they were accompanied by a mammoth 200-person delegation.

Discussions during the meetings touched on nearly all of the most important and sensitive topics. Some areas of disagreement were predictable, including continued US arms sales to Taiwan and China’s burdensome internet restrictions. Some areas of cooperation were equally predictable, most notably an emphasis on the need for coordinated efforts to help the global economy emerge from recession.

Not surprisingly, the issue of North Korea promptly took center stage. That would probably have been the case even without the recent surge in tensions between South Korea and North Korea over the sinking of the South Korean ship Cheonan. Pyongyang’s persistent refusal to rejoin the six-party talks on the country’s nuclear program, combined with the continued pursuit of nuclear and missile technology, guaranteed that policy toward northeast Asia’s principal troublemaker would have a high priority on the dialogue’s agenda.

Evidence that a North Korean torpedo sunk the Cheonan has made North Korea’s behavior an even more urgent topic of discussion. And the talks have revealed a significant gap between the positions of Washington and Beijing. US officials want China to be more proactive in reining-in Pyongyang. In particular, the Obama administration is prodding Beijing to use its leverage as the principal source of North Korea’s energy and food to gain concessions on the nuclear issue and other matters.

China’s irritation with its volatile ally is growing, but Chinese officials remain reluctant to use coercive measures, including economic sanctions beyond those that the UN Security Council has already approved. Indeed, Beijing seems wedded to the opposite strategy of trying to coax Kim Jong-il’s regime through economic incentives to be more responsible. That was the thrust of China’s new promises of aid earlier this month during Kim’s visit.

Washington’s impatience with Beijing’s foot-dragging on the North Korea issue is rising, but Chinese officials are unlikely to make a dramatic change in policy. They fear that too much pressure could cause Kim’s regime to collapse–and perhaps the North Korean state itself to implode. Such a development would lead to several problems for China, including disruptive, burdensome refugee flows.

Prospects for cooperation are only a little better regarding the Iranian nuclear crisis. In recent months, Beijing has become somewhat more receptive to a new round of UN sanctions against Tehran. Even so, Washington is not entirely satisfied. China’s more cooperative stance has occurred only after Chinese negotiators successfully diluted any sanctions that the Council might approve. And those negotiators apparently drove a hard bargain to get key Chinese firms exempted from both unilateral US sanctions and multilateral sanctions. That concession by the Obama administration is extremely controversial in the United States.

The economic phase of the dialogue is proving to be at least as contentious as the security portion. Geithner and Clinton reiterated Washington’s complaint that China’s currency is undervalued, thereby giving Chinese products an unfair advantage in the global marketplace. Beijing has once again responded that it will address that issue, but only on its own terms. That means any revaluation likely will be little more than tokenism whenever it occurs. The issue will be a continuing source of irritation, since the Obama administration is under mounting pressure from Congress and important domestic constituencies to be more assertive regarding “unfair” Chinese trade practices.

China’s caution on the currency issue has intensified with the sharp decline in the value of the euro in recent weeks. That development already makes Chinese imports more expensive in the important European Union market. An upward revaluation of the yuan would make that problem worse.

Concern about the euro is symptomatic of a larger worry about the sovereign debt problem afflicting several EU countries. There is a noticeable difference of opinion between US and Chinese participants in the dialogue about that development. US officials believe that the sovereign debt fallout, highlighted by the crisis in Greece, can be contained, and that the economic health of the European Union is sound. Chinese policymakers are more apprehensive and regard the American position as unduly complacent.

A related issue creating some tension between American officials and their Chinese counterparts is the US government’s fiscal policy. Chinese leaders have been alarmed for some time about the massive US federal budget deficits. Although China has thus far been willing to buy Treasury debt, officials are sending warning signals that their appetite for such debt is not unlimited. The not-so-subtle message is that America needs to get its fiscal house in order. An underlying worry is that US leaders might be tempted to inflate their way out of the debt problem–a move that would drastically undercut the value of China’s vast dollar holdings.

Chinese participants in the current dialogue can’t be pleased with the US stance. The American delegation does not seem terribly worried about the continuing flow of red ink, believing that the deficits will shrink once the economy rebounds and the stream of tax revenues returns to normal.  But the Chinese have reason to be concerned. Even the Obama administration’s projections (which are based on very optimistic assumptions about future economic growth) show annual deficits in the range of 400 billion to 700 billion dollars over the next decade. While that is less than this year’s probable deficit of 1.4 trillion dollars, it is still a case of alarming profligacy.

Ultimately, of course, the strategic and economic dialogue sessions closed with proclamations of success and promises of future close cooperation between China and the United States. And both countries do have important incentives to work together on a wide range of issues. But such rhetorical expressions of good will go only so far. There are significant policy disagreements and bilateral tensions. The second annual dialogue, although reasonably cordial and constructive, confirms that reality.