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US-CHINA: Spring Thaw to Summer Squall

Eli Clifton

WASHINGTON, Jun 14 2010 (IPS) - Earlier this spring, many here in Washington were hopeful that Chinese president Hu Jintao’s attendance at the Nuclear Security Summit, the U.S. Treasury Department’s decision to hold off on naming China as a “currency manipulator”, and China’s support of U.N. sanctions against Iran all pointed to a thaw in the cool relationship between the Barack Obama White House and Beijing.

But the spring thaw has segued into a summer squall as U.S. politicians, in anticipation of mid-term elections in the fall, are making renewed calls for the Treasury Department to list China for manipulating the Renminbi (RMB) exchange rate.

Beijing, for its part, has contributed to the downturn in relations by cutting military exchange programmes between the U.S. and China for 2010 to protest U.S. arms sales to Taiwan and express its concerns over a pending decision by the White House to authorise the sale of new F-16 fighter jets to Taiwan.

Chinese frustration with the U.S. military support of Taiwan became particularly evident on Jun. 4 when Maj. Gen. Zhu Chengdu, director of China’s National Defence University, made a pointed public attack against the U.S.

“I believe this sort of arms sale sends to the Chinese the wrong signal: that is, the Chinese are taking the Americans as partners as well as friends, while you Americans take the Chinese as the enemy,” he warned at the Shangri-La Dialogue in Singapore, an annual meeting of defence ministers.

The freeze in military exchanges is just the latest in Beijing’s protests over arms sales, but the suspension of military ties would suggest a growing confidence from China in both its military capabilities and its ability to impose real costs on Washington for policies which Beijing interprets as designed to prevent the unification of Taiwan with the mainland.

U.S. Secretary of Defence Robert Gates responded to the Chinese decision with his hope that U.S.-China military relations would move beyond the issue of Taiwan arms sales.

“But we will maintain our obligations and, frankly, I would very much like to…see the military-to-military relationship cease being the sole focus of the response to these sales because I think that there is great opportunity and great benefit in a greater dialogue between us,” said Gates.

While Gates may have been focusing on the deterioration in the military relationship, the growing row over China’s currency is gaining momentum in Washington as lawmakers, facing a contentious summer of campaigning amidst a flagging U.S. economy, seek to pursue the populist agenda of attacking China’s valuation of the RMB.

High unemployment numbers and a U.S. business community which is increasingly critical of China’s valuation of its currency and its failure to adequately enforce intellectual property rights protection has pushed lawmakers to take a critical stance towards China’s economic policies.

Last week, Senate Finance Chair Max Baucus demanded that the Obama administration stop overlooking the growing economic issues in the China-U.S. relationship in favour of the broader strategic issues of the relationship.

During last week’s Senate finance panel hearing on U.S.- China trade relations, Treasury Secretary Timothy Geithner found himself on the receiving end of Congress’s frustration with the widening trade deficit with China and continuing high unemployment numbers at home.

“Billions and billions of dollars, millions and millions of jobs flow to China simply because their currency is manipulated,” said Sen. Chuck Schumer.

Adding to the tensions on Capitol Hill is the fact that the Treasury is two months overdue in issuing its annual report on currency misalignment.

Last Wednesday, Senate Republicans succeeded in introducing an amendment to a pending tax bill which would require the administration to make a quarterly report of the dangers posed by China’s holdings of U.S. debt.

Indeed the tone of U.S.-China relations over the summer months might be determined more by the outcome of the disagreement between lawmakers on Capitol Hill who are seeking a tougher stance toward China’s growing trade surplus with the U.S. and a White House which seeks to maintain good diplomatic relations and, among other policy goals, might be looking to improve military ties and various other bilateral relationships after the combative meetings in Singapore earlier this month.

The U.S. Treasury has, so far, avoided listing China as a currency manipulator, a move which many lawmakers perceive as an attempt by the administration to slow-dance one of the more challenging issues in U.S.-China economic relations.

During his Senate testimony last week Geithner sought to defuse Congressional anger with China’s currency and the Treasury’s foot-dragging in confronting the problem.

“The distortions caused by China’s exchange rate spread far beyond China’s borders and are an impediment to the global rebalancing we need,” he said. Reform, he added, is “critically important to the U.S. and the global economy”.

Geithner has found himself in the middle of a difficult balancing act between an increasingly impatient Congress and sensitive diplomatic exchanges with leadership in Beijing who do not want to be seen as bending to U.S. pressure.

At the U.S.-China Strategic and Economic Dialogue last month Hu indicated that Beijing was still committed to the reform of its currency and, publically, U.S. Treasury officials had said that Beijing should be allowed to make adjustments to its currency at its own pace.

The Chinese Foreign Ministry issued a rebuttal to the combative language coming from Washington during a press conference on Tuesday in Beijing.

“RMB appreciation will neither resolve the trade imbalance between China and the U.S., nor address other domestic issues in the U.S. such as low savings, credit spending and unemployment. We hope the relevant U.S. political figures could think seriously about how to resolve the structural problems in U.S. economy instead of blaming others all along,” said Foreign Ministry Spokesperson Qin Gang.

Qin continued, “When and how the reform [of the RMB’s exchange rate] will take place depends on our overall consideration based on the changes in world economic situation and the performance of China’s economy.”

As congressional midterm elections draw closer the White House will face the tough challenge of maintaining positive diplomatic relations with leaders in Beijing who are exhibiting new levels of assertiveness on military and economic issues while, at the same time, facing down lawmakers who are feeling pressure from their constituents to take action against Chinese policies perceived, wrongly or rightly, to be contributing to the trade imbalance and high unemployment.

The White House, no doubt, sees that maintaining good relations with Beijing can help in controlling North Korea, imposing an enforceable multilateral sanctions regime on Iran and easing the inherent tensions as China aspires to take on great power status. But domestic political pressures this summer will test the White House’s ability to follow through on its foreign policy agenda.