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    Greater China
     Dec 18, 2010

Testing times ahead for Sino-US ties
By Benjamin A Shobert

As 2010 draws to a close, policymakers in Beijing and Washington must be drawing a collective breath at having successfully navigated a particularly difficult year.

Events of the past year repeatedly pushed on the most sensitive of ideological disagreements between American and China, escalating in intensity and duration as the year advanced. And while a sense of relief at having closed the books on this year without further damage to US-Sino relations is understandable, such feelings should not mask the reality that several

problematic and yet unanswered questions remain unresolved between the two countries.

Perhaps none of these questions are more important than those that have to do with how attitudes within America's political institutions are changing towards China. In 2011, the US Congress will face several pressing questions that have, at their root, unresolved fears over China's rise. First, and perhaps most important, is whether congress will intensify its rhetoric against China, or choose to intentionally avoid using China as a scapegoat for American ills.

During the past year, the Google hearings provided Congressional leaders with a rare opportunity to combine business issues and political philosophy together, consolidating their perspective on China's iron-fisted grip on information control and China's openness to American business together into one all-encompassing conversation.

Consequently, the Google hearings featured loaded rhetoric about China's communist rulers, how they should not be trusted, and how they are not interested in the sort of openness and liberalization Americans naively assume.

Fortunately - or if one views China's ongoing enmeshment into the world's established order as a bad thing, unfortunately - 2010 advanced with only one more pocket of turbulence where China's autocratic impulses were put on display for the world to see. Admittedly, that one moment was a truly awful one, as the country summoned its most immature of responses in response to Liu Xiaobo being awarded the Nobel Prize.

These two events made a bad impression in the popular consciousness of most Americans and their politicians, drawing into tighter focus an understanding that China's political trajectory towards democratization remains illusory, an American hope and not a Chinese intention.

Consequently, as 2011 opens, the US Congress senses American frustrations and discontent with China in ways that less troubling of economic times would have masked. As the year moves forward, American politicians will likely grow more comfortable using increasingly harsh language to describe China's politics and trade policies.

Historically, one of the antidotes to congressional fury has been the executive branch, but as 2010 draws to a close, it is possible to see that one of the most critical unanswered questions remains whether this will continue to be the case with the Obama administration.

In the past, when relations between the two countries have been strained to the point of fraying, it has been the executive branch that has taken the longer-term perspective, arguing not only that it will ultimately prove good for America to continue its relationship with China, regardless of the short-term bumps in the road, but that most importantly it is America's responsibility to encourage China's transformation into a democracy. President Bill Clinton made both these points forcefully and eloquently in his defense of China's entry into the World Trade Organization.

However, the times have changed, most notably with the fragility of the American economy, and amid a domestic market still short on opportunity and long on downside risk, the Barack Obama executive branch is under pressure to further escalate the war of words with China.

The lowest-hanging fruit on this poisonous tree would be the formal declaration of China as a "currency manipulator". Such an action on the part of the US Treasury would only occur with the implicit endorsement of Obama and would mark a historically ominous adjustment in how the American presidency views China.
It remains a large and ominous unresolved question as to whether American politics is finding bipartisanship over China's trade policies and domestic politics. If so, even the historical insulation provided by the president's office could go away in 2011, and tension between the two countries could dramatically rise. Whereas in the past, policymakers from the executive branch could argue for caution and prudence in the language used and the actions taken, 2011 could prove to be the year when the American president goes from being an advocate of China's emergence to a critic.

The more productive, yet largely unanswered question being asked within Washington is what America needs to do in response to China's ongoing mercantilism in general, and the heavy incentives Beijing is dispensing to key industries such as information technology and green-tech. Labeling China a "currency manipulator" might be emotionally appealing, but it is unlikely to change much for the American economy. To create meaningful change, the American congress needs to answer a critical question: will it act to protect or incentivize key American industries?

For politicians, the path of least resistance is to protect American industries. Protection is a simpler concept to sell and an easier platform upon which to campaign. In a political climate where spending money on anything has grown increasingly difficult to sell, American politicians may view protecting American industries as more essential than investing in and further fostering them.

Unfortunately, China has made this sort of political posturing easier: during 2010, Beijing's indigenous innovation policies have added fuel to the fire over the country's nationalist economics and how they act to prevent American high-technology exports into China from accessing lucrative applications.

This remains a crucial difference between American and Chinese politics: the need to get elected drives American politicians towards easy answers, in this case simply protecting industries at risk, where the closed Chinese political system allows the state to act more forcefully, with a time horizon that is not measured purely by a political cycle.

As a result, Chinese companies in key industries are likely to receive additional incentives and direct investments that will further propel them forward, creating an opportunity to push new technologies towards commercialization before American industry can catch up. The harder answer to the question of incentivize versus protect is to stand up and argue for policies that provide the widest latitudes possible, the greatest investments feasible, into the most promising of industries, those that hold the greatest potential for advancing and transforming the American economy. Whether American politics in 2011 will tolerate such a conversation - one that will inherently require additional capital to be invested, and hard choices to be made about what industries to let go of - remains to be seen.

But the close of 2010 does not leave the only unanswered questions on America's doorstep. China faces several critical open matters as well, perhaps not least of which is how it will respond to the potential hardening of American political attitudes towards it. In the run-up to the 2008 Beijing Summer Olympic Games, many outside the country were not surprised at the hardening of certain domestic policies; but the ongoing actions by the Chinese government since then have left some scratching their heads, sensing an overall increasing brittleness to criticism, and a slightly harsher tone towards internal dissent. Actions taken by the government since 2008 suggest a country very much aware of how far it has come and how fast it has risen, measured equally with a conviction that it could all just as quickly come apart.

China's own internal challenges are not fully appreciated by many in Washington. Amid China's ability to continue generating gross-domestic-product growth in the midst of a severe global economic contraction, many outside the country have overstated its strengths. China remains a country deeply mired in poverty, with a predominantly agrarian work force and a largely uneducated populace.

The societal problems facing its leadership are enormous, and mirror many of the same problems that have spun out of hand before, launching the country into disastrous civil war and political revolution. China's leaders, many of whom can be rightfully criticized for lacking an appreciation of human liberty and the need for opposing voices to have their say, also care deeply about avoiding the problems of the past, and their actions of the last year, while at times stilted and unfortunate, deserve to be seen as an attempt to manage the country's way forward.

Surprisingly, 2011 may require China's leaders to take the high ground, to absorb some criticisms of its trade policies from its trading partners like the US, and where necessary, to make adjustments. In this vein, an important question is whether China will make changes to several of its trade policies - the previously mentioned indigenous innovation and revised medical-device regulations as two examples - that will send the message to its trading partners that it understands the need to further open to outside competition. Among the most important deliverables American politicians could achieve next year would be these sorts of adjustments by China of its domestic economic policies.

While China's ability to make these sorts of changes may be less constrained by politics than similar matters would be in the US, China is likely to face a critical question in 2011 about its growing accumulated wealth. More specifically, will China have to put its cash reserves to use next year to further stimulate the Chinese economy because of an still stagnant global economy, growing protectionism in its export markets, or instability within the Chinese domestic economy? The assumption - ironically shared in Beijing and Washington - is that China will largely continue its policy of investing in US Treasuries.

But China's own internal economy may face some challenges in 2011 that are beginning to show themselves this year. One of the lingering questions revolves around China's real-estate market and whether an implosion there could set off a chain of events that will cascade throughout the country's financial markets, creating a crisis for a banking system beset with underperforming loans. China's real-estate market is showing many of the classic signs of a bubble: in several large metropolitan markets, vacancy rates are climbing, but new building applications continue to move forward.

Stories of people flipping properties, or using the increase in the book value of one home to leverage and purchase another, circulate the country, reminiscent of Joe Kennedy's apocryphal shoe-shine boy whose ominous stock tip to Kennedy persuaded the legendary investor to sell his equity holdings immediately. The effect of a sharp consolidation in real estate would likely have an immediate impact on the Chinese economy, forcing the government in Beijing to act forcefully with additional stimulus, and likely starving American Treasuries of some portion of Chinese cash, a relationship that has been taken for granted for too long.

As with many of the looming unanswered questions from 2010 that both countries will carry into the New Year, China's problems are likely to become our own, and vice versa. Each country faces a set of problems they feel are unique to them, a set of circumstances and culture that is underappreciated by their counterparts across the ocean. The reality is, even when set against a year beset by a number of problems - some of them running to the core of our respective beliefs and identities - the most difficult of these questions has an immediate parallel in the other country as well.

It is not only American politicians that are struggling with the distinction between protecting and incentivizing industry; China also wrestles with this. And it is not only China that desires its people to have a vibrant future built on a strong domestic economy; this is also America's objective. Perhaps no more fundamental question will be carried into 2011 than this: will both countries continue to find common ground, a shared cause for working and engaging with one another? Or will the next year mark when the countries began drifting away from each other towards tension and conflict?

Benjamin A Shobert is the managing director of Teleos Inc (www.teleos-inc.com), a consulting firm dedicated to helping Asian businesses bring innovative technologies into the North American market.

(Copyright 2010 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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