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Engage China - Don't Enrage China

Updated On: Feb 02, 2009

ON THE day President Barack Obama was inaugurated, I went on American television and suggested that he needs to engage Asia if the United States is to tackle global problems successfully.

This seemed a hard message to digest given the economic crisis and so many hotspots in the world. There is Afghanistan, where Mr Obama has promised attention since he hit the campaign trail, and the Middle East, which boiled over in the weeks before he took office.

By contrast, in Asia, while not without problems, nothing seems to be as urgent. But maybe someone was listening. The new administration has begun to engage Asia, but in a way I never intended. It’s also in a way that may be the start of more bad things. Rather than engaging Asia and China, which is a vital part of the region, the new administration may be enraging it.

In this past week, the new Treasury Secretary Tim Geithner grabbed headlines with his statement that China is manipulating its currency.

The accusation suggests a deliberate and unfair policy to keep the Chinese yuan low, thus making US imports into China more expensive to lessen demand while a low yuan keep its goods cheap and attractive to US buyers. This theory, by no means new, helps explain the huge deficit between the two countries simply: It’s China’s fault.

Such an accusation could not pass unnoticed. China replied, quickly and strongly denying manipulation.

This early and testy exchange adds to speculation that the Obama presidency will see a rise in protectionism and China-bashing. Some in the US in business and unions precisely hope that the Obama administration will toughen its stance against “unfair” competition from China. Such sentiments are easy to fan, given the current pain and job losses across America. It’s easier to blame someone else than admit to one’s own faults.

And who better to blame than China?

Indeed, many suggest that it is inevitable that China as a rising power will contest against the incumbent big dog, the US. So what we see now may be the first skirmishes in a growing contest.

I hope not. I think such a contest is neither inevitable nor best for both countries and indeed the world.

You scratch my back ...

There are those in the new administration who know China well, including Mr Geithner, who lived there as a child and speaks Chinese. They ought to know the chill that China itself has felt since the turmoil started. The fall in trade figures and the rise in the loss of jobs across the mainland have been deeper and sharper than anticipated.

There are concerns that slower growth can trigger wider problems across the Chinese financial system, which has been going through a transition, despite the country having trillions in reserves. And there are fears that such a scenario of slow growth and turmoil will trigger social unrest.

The new Obama administration will hopefully understand that they are not the only ones with domestic concerns in this time of turmoil. Even if China is not a democracy, the voice of the people gets loud. Indeed, precisely because their leaders are not popularly elected, they may be more anxious to deliver results or risk undermining their legitimacy.

Despite their own domestic dislocations, we must hope US policy-makers can see that China and other Asian states are not gaining at their expense. All are feeling the ill-effects of this crisis.

If so, we can hope that this exchange is not the start of rancour but rather a kind of ritual. Mr Geithner was, after all, answering questions in Congress, where quite a few want a tough line on China. His was a statement for a domestic audience.

On the Chinese side, we can hope that theirs was a pro forma reply, stock responses used whenever the last US Treasury Secretary Henry Paulson raised the same issue. Their statement moreover masks the appreciation that the yuan has shown against the greenback over time.

Just as former Presidents Bill Clinton and George W Bush started bashing China and then circled back to a positive engagement, so too might the Obama administration. We can hope that, despite some turbulence, both sides know how much is at stake.

The interdependence between the two economies is deeper and broader than ever.

And as China is an aggregator for much of Asia’s manufactures, this is a key relationship across the entire Asia-Pacific.

The fact that the Chinese government is the largest holder of US Treasury Bills is much remarked upon. But it must not be taken to mean, as some Americans seem to colour it, that China holds the US hostage. Rather, it underscores their interdependence.

This requires global thinking, not kneejerk reactions that play solely to domestic audiences in either country. Engaging Asia and especially China will be an essential policy to deal with the economic malaise.

It used to be that if the US sniffled, Asia caught the cold. Then, for a while, some people posited that Asia and China’s growth was irresistible and that the economies were decoupled. The emerging truth is something in between. The financial contagion — like the flu — can flow both ways. And both sides have to keep their body politic healthy, and avoid passing more bugs to each other.

Author: 
Simon Tay
About the author: 

Simon Tay is Schwartz Fellow with the Asia Society in New York and Chairman of the Singapore Institute of International Affairs.

 




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