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Foreign Policy

Obama Should Adopt a New Approach for China

Nov 08 , 2012

 While there are numerous challenges for President Obama to tackle in his next administration, China does not have to be one of them. All we need is a fundamental change in the United States’ approach to China and the bilateral relationship.

The first step in resetting the bilateral relationship is to recognize the campaign rhetoric on China for what it was: nonsense. Both candidates felt obliged to savage China for the United States’ ills but the voters saw through the political ruse and did not pay any attention.

Who’s the currency manipulator? The United States is. No one can be expected to keep up with our Fed-run printing presses. Even so, the RMB has appreciated by about 32% since it was taken off the peg to the dollar.

Let’s also not talk about outsourcing jobs as if companies are committing grand larceny. Private enterprises make rational decisions. They send the work to China or elsewhere because it makes economic sense. When it ceases to make sense, the work comes back. We have seen this process go through full cycles, yet the political rhetoric chooses to ignore it.

Adding an import duty on goods invariably backfires, as has been the case with the 30% duty on auto tires made in China. A few hundred jobs may have been preserved but all American consumers ended up paying significantly more for their tires, and in the end most of the tires were still foreign-made, just not from China.

Raising tariffs also prompts retaliation. In a tit-for-tat, China raised tariffs on American chicken, which may have cost as many jobs on Tyson’s assembly line as the gains at the Goodyear plant. Time and again, nobody wins in trade wars.

China has an apparent huge trade surplus with the US and we hold that against China. But why should we object to being able to buy our iPad and stuffed animals at a much lower price than if they were made in the US?

Furthermore, as many economists have pointed out, the trade surplus is not exactly what we say it is. For example, the added value of China labor in an iPad is about 2% of the total cost. Many of the components and assemblies are made in Japan, Korea and Taiwan (and even some in the US) but China gets all the “credit” for the import value.

It’s not as if enjoying a trade surplus when doing business with the US is some extraordinary aberration. The US has a trade deficit with 98 countries because this is the way our American economy works.

One of the first principles of the Chinese classic, Sun Zi’s Art of War, is to know your counterparts before engagement, be they friend or foe. Perhaps it’s time that we take a look at how China regards this bilateral relationship to gain the more solid understanding of what actions to take.

The Chinese public was fascinated by the presidential election. Apparent exercise of democracy in action made the people in China wishful that some would rub off on their leadership.

The financial tsunami of 2008 and its aftermath had shaken the Chinese confidence in America’s ability to manage its finances, and has caused them to diversify their hard currency holdings and to make the RMB more accepted as an international currency. The trauma, however, has not changed China’s regard of the US as a vital economic partner.

It simply is not in China’s national interest to consider the US a hostile competitor. China has numerous internal challenges and does not need the distraction of external confrontations.

For more than a decade the leaders of Beijing have been talking about the urgency of combating graft. Endemic corruption saps the economy and, more importantly, erodes the legitimacy of those in power. While success in overcoming corruption is problematic, it will be the foremost preoccupation of the incoming leaders.

Secondly, even though the US has a serious employment problem, it pales in comparison to the one Beijing has to face. Just finding jobs for the approximate 8 million college graduates every year is beyond American comprehension.

Although Obama’s pivot to Asia defused accusations during the campaign for being soft on China, he needs to review the consequences of this policy.

It is not in the Chinese DNA to compete with the US for world hegemony. However, if China’s sovereignty is being tested by US activity in Asia, China will not quietly stand by. Rather than enhancing stability, the increased American military presence has encouraged Japan, Philippines and Vietnam to be more energetic in contesting the islands off China’s coast.

In response to the aftermath, China has established Sansha city and permanent military garrison in the middle of South China Seas. While China has no appetite to match US military might on a dollar for dollar basis, China will look for high leverage, low cost counter to any increase in American military presence.

It’s time the US reexamine the concept of strategic ambiguity in dealing with China. It simply has not worked. Sometimes friendly, sometimes hostile, sometimes cajoling and sometimes imposing – this has merely led to a permanently rocky relationship. Both the US and China can better deploy their energy on other issues rather than managing the ups and downs of the bilateral relationship.

With the incoming new generation of leaders, Obama should try a new approach: be transparent. Lay all the cards on the table and agree on the issues that the two countries can work on together—an approach Deng Xiaoping would applaud.

The US can’t really afford to allocate money it doesn’t have to build up a military presence, one that would only increase tension in Asia. With China, cooperation trumps confrontation.

Dr. George Koo is a retired business consultant and a Board Member of New America Media





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