Tuesday, January 3, 2012

Trying times in US-China ties, hope and hubris as the globalized world splinters....

Trying times in US-China ties, hope and hubris as the globalized world splinters....
By Benjamin A Shobert


Now would be a spectacularly bad time for American political leaders to reach new levels of acrimony and dysfunction, yet this appears to be precisely what the United States has in its immediate future as the country lurches forward in a fractious presidential election year.

Similarly, now would be a uniquely bad time for Chinese political leaders to further confuse the rest of the world, as well as their own citizenry, regarding their mid-term intentions on political liberalization and economic reform, yet this also appears to be exactly what is taking shape as Beijing prepares for an autumn 2012 transfer of power.

Both China and the United States enter 2012 fragile in their own ways, needing one another to be strong while at the same time resenting the vestiges of strength each appears to have over the other (China resenting America's regional position and military power while America resents China's seemingly stable economy).

This is in a nutshell the peril of 2012: both have as much to gain from seeing the other stumble as from stability. Added to this unfortunate reality is that the two most powerful countries in the world must navigate their most critical transfers of political power amid unhappy citizens in China and a disquieted populace in America.

This fine line must be drawn as further economic contraction appears to be already well set in motion in the United States, and ominously seems to be gathering speed in China as well.

Rhetoric, the most obvious way in which these tensions will find public light, is likely to grow increasingly noxious on both sides. The rhetoric that comes from America during the midst of a heated and unsatisfying election will likely attempt to cast China as equal parts miscreant and devious; similarly, the rhetoric that comes from China will inevitably portray America as an insecure and short-sighted bully.

While much of what is likely to be said during the year may be considered extreme but still within the bounds of acceptable - if maddening - political discourse, the underlying reality of the probable exchanges during 2012 is that the two countries' relationship is slowly repositioning itself for a moment when rhetoric and policy align.

Established wisdom has it that the political rhetoric between the two countries can be easily divorced from actual policy changes; however, during 2011 establishment thinking has been shown to be increasingly feckless as the American Congress pursued one shortsighted political fight after another.

Among the key take-aways from 2011 is that the established wisdom in Washington is no longer adequate guidance for what American politicians will or will not pursue. The wall of separation between politicians and policymakers once widely assumed to be resistant to short-term strife and uncertainty no longer appears to be. While the wall may not be breached in 2012, the makings of such a moment are close to being in hand.

For some the idea of a moment in time where China and the United States could crash into one another smacks of fatalism, an argument about how it is inevitable for a rising power to do anything but threaten the relative station of those nations who constitute the established order.

To critics of the increasingly popular sense of inevitability and fatalism about such a conflict, the deep economic inter-connections between the American and Chinese economies remains the most important reason why disagreement will not ultimately create conflict. Yet if one lesson stands out in the years since the spectacular financial crash of 2008 it is that the established wisdom is many times less wisdom and more wishful thinking.

Among the chief lessons that should be painfully obvious now is that simply because something might be unimaginably disastrous does not mean it is impossible.

For years, supposed experts on the American housing market had assured consumers that houses should be looked at as an investment and that, while some short-term price fluctuations were possible, they were unlikely to be drastic and would not last.

Similar moments of spectacular hubris have been the seeds of the world's recent financial destruction and now, as the eurozone peers into an increasingly uncertain future and the much-lauded emerging economies throughout the BRICs appear to be stumbling, the question of whether now might be a moment where simmering tensions between China and the United States reaches a critical inflection point should be asked by sober thinkers and humble policymakers.

For years, China experts have acknowledged that tensions between the two countries were natural but ultimately manageable. The question is, have either or both countries reached a point in time where this prevailing wisdom no longer holds?

Answering this question requires evaluating two questions: first, when do the interests of American or Chinese politicians no longer align with a policy of engagement towards one another and second, when do those institutions (business, non-governmental organizations, think-tanks) who have historically been advocates for engagement and who exert very direct influence on politicians begin to pull away or redefine their historical stances towards the other country?

Answering the first question is likely easier relative to American politics, if for no other reason than Washington's political machinations are more transparent than those in Beijing. With this in mind, 2012 is likely to see additional efforts on the part of many in congress to pursue legislation designed to counteract the yuan's valuation relative to the US dollar.

This has become such a regular potential threat that many have assumed it will forever be something held over China's head, but never acted upon. This might be a mistake: American politicians feel increasingly unable to do anything meaningful to help address their languishing domestic economy.

The combination of a lack of imagination, a particularly unpleasant election cycle, and the ongoing emphasis on China's currency as the cause of lost manufacturing jobs might well result in actual policy changes in 2012 that were not pursued previously when cooler heads could be counted on.

If American politicians find themselves unable to fight the impulse to blame China for mistakes of their own making, politicians in China are likely to respond in kind. While the Chinese transfer of power in the autumn of 2012 is less transparent, the act of governing in advance of this event as well as in the tenuous months immediately following the politburo's election are no less critical to US-China relations.

In particular, if the Chinese economy is showing signs of additional distress - something that seems today all but inevitable given the increasing signs of trouble in the Chinese property market, issues with gray loans between state-owned enterprises, local government and troubled small- and medium-sized enterprises, as well as overall drops in economic activity - then China's politicians are likely going to find it convenient to shift the focus of unhappy Chinese citizens from domestic policies towards the ugly war of words coming from Washington.

Counter-balancing all of the political rhetoric are the interests of multinational businesses that desperately need access to China's market and, equally, China's exporters who cannot afford to see new duties or tariffs be created in their European and North American export markets.

On both sides of the Pacific, these powerful and well-connected business lobbies have thus far been successful at preventing political rhetoric from boiling over and creating a toxic trade environment; however, their influence is not inexhaustible and, at least as viewed from America, no longer the predominant influence shaping policy.

Within American policy-maker circles, the historical policy of engagement between the two countries is under assault as never before. Of all the potential areas where hubris might blind China experts to the possibility that 2012 could be the year where things between the two countries irrevocably change for the worse, missing the growing voices of suspicion in the United States that China is ultimately going to further reform its economy or political institutions should not be overlooked.

Thus far, American multinationals have been successful advocating for overlooking these problems and believing that China will ultimately get back on track, but this argument has a limited shelf life.

As two of America's congressional commissions, the Congressional Executive Commission on China and the US-China Congressional Committee, grow increasingly frustrated with what they see as China's backwards moves in the area of political freedoms and economic reform, they will grow increasingly discontent.

This they will show by simply pointing out what they see as problems with the US's policy of engagement towards China and will begin pushing for more formal adjustments to how America works with China and views the possibility that China will never modernize as policy-makers have long anticipated.

This adjustment, while seemingly simple, will align with very practical political concerns from other parts of congress that might share some level of concern about China's political reform, but much more acutely believe China's economic growth has come at America's loss.

The net result of such a realignment would be to put increasing pressure on America's businesses and their assertion that doing business with China remains the best way to change China's trajectory.

The hope that 2012 will be only a difficult year between the two countries but that ultimately not much will change may be the sort of dangerous combination of hope and hubris that preceded the events of the 2008 financial crisis.

Recognizing this, the need for clear-headed analysis of what really ails the American economy and how China must navigate the need for political control but increased personal freedom will be more important in 2012 than in any previous year.

To the extent neither country's leaders prove capable of rising to meet these challenges, 2012 may well mark the moment in time when the globalized world we all took for granted began to splinter and fall apart....