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"I believe that to meet the challenges of our times, human beings will have to develop a greater sense of universal responsibility. It is the foundation for world peace."

U.S.-China Friction: Why Neither Side Can Afford a Split

February 10, 2010

Zachary Karabell
Time Magazine
February 8, 2010

It hasn't been a banner few weeks for U.S.-China
relations. In mid-January, Google announced that
it was contemplating pulling out of China because
of repeated attacks on its network as well as
censorship constraints. In the past week, the
U.S. government authorized $6 billion in arms
sales to Taiwan, and the White House announced
that President Obama would meet with the Dalai
Lama after having postponed that visit last fall
on the eve of Obama's trip to China.

Beijing's response has been increasingly
unfriendly, even hostile. A senior Communist
Party official announced that any meeting between
the President and Tibet's spiritual leader would
"seriously undermine the political foundation of
Sino-U.S. relations" and would lead to
"corresponding action" — a phrase made more
ominous by its utter vagueness. Then, in response
to the proposed Taiwan arms sales, the Chinese
threatened sanctions against U.S. defense
companies, which include conglomerates doing
substantial nonmilitary business in China such as
United Technologies, which has seen booming
demand for its Otis elevators in Chinese
skyscrapers, and Boeing, which has staked its
future growth in part on demand from China's air
carriers. Most recently, on Feb. 5, China's
Commerce Ministry accused the U.S. of dumping chicken on the China market.

This increasing truculence is a direct reflection
of a rapidly shifting economic balance of power.
One of the consequences of the financial crisis
of 2008-09 was the catapulting of China to the
forefront of the global economic system. That
trend wasn't created by the crisis, but the
crisis certainly accelerated it. As the U.S.,
Europe and Japan contracted sharply, China
registered its own brief, if scary, dip and then
proceeded to use its trillions in foreign
reserves to undertake a massive spending program.
More effective than similar stimulus packages in
the United States and elsewhere, the approach by
the Chinese government not only halted the swoon
but propelled China to even more robust growth.

China's relative strength has attracted
considerable attention. From Washington to Tokyo
to Davos, global business leaders are hailing
China's resilience and calling on Beijing to take
a greater role in governing the global economy.
Its model of state-driven capitalism, having
weathered the storm, has won widespread praise
(as well as criticism), and slowly Chinese
leaders have taken note. Now there are signs that
all the talk of the Chinese miracle has started
to have an effect -- and not a good one.

The recent flurry of hostile words was capped by
a haughty rebuttal of U.S. Commerce Secretary
Gary Locke's criticism of Chinese economic
policies that favor domestic companies over
American and foreign competitors. Said the
official Xinhua news agency: "Ironically, the
United States is now turning around and accusing
China of protecting its domestic companies.
Burdened by high unemployment and facing mid-term
elections in November, some people in the U.S.
are trying to shift public attention from thorny
political and economic issues to other countries.
However, such irresponsible moves will prove to
be unhelpful, and China will not accept being a scapegoat."

In short, China is brimming with confidence, and
in recent weeks that self-confidence has turned
into arrogance, with scorn for the U.S. There is
a long legacy of Chinese distrust of the West.
Today, Chinese nationalists cannot explicitly
criticize Beijing, but they can indirectly attack
the government by challenging the close
relationship between the U.S. and China. For many
in China, the U.S. is a corrupt nation that bears
China no goodwill and will drag China down if
Beijing doesn't find a way to distance itself
from the American economic embrace.

But while many Chinese take delight in America's
plight and would like to end the close embrace
that has brought China such prosperity over the
past two decades, they are falling prey to
delusions of grandeur. The fact remains that as
much as China may want to go it alone, it cannot.


To begin with, it holds more than $1 trillion in
U.S. assets, mainly in U.S. Treasuries. No other
country or entity in the world could absorb those
assets if China wanted to sell them, and with
China's currency value pegged to the dollar, any
massive sale would lead to a steep decline in the
Chinese currency and economy. China's holding of
U.S. debt is leverage only in a theoretical world
where it could dump its U.S. assets or stop
buying more. What's more, even a hobbled America
is the world's largest economy and the most
significant market for Chinese goods. In 2009, a
supposedly bad year, Chinese exports to the U.S.
were approximately $300 billion, about the same
as in 2007. That is a vast source of income for
China — and one that no other part of the world can provide.

The U.S., meanwhile, has been a source of
billions of dollars in direct investment in
China, from thousands of American companies big
and small. While it's true that China doesn't
need any one of these companies as much as each
one needs China, China needs all of them and
depends on them for everything from brand-name
goods to know-how and capital. Beijing can't just
snap its fingers and go it alone; its domestic
economy is far too entwined with that of the
U.S., its companies, its capital and its consumers.

There's little question that neither China nor
the U.S. wants to be dependent on the other.
China's rhetoric of late is proof, and you could
easily demonstrate the same attitude coming from
Americans. But each country has tied its economy
to the other, and buyer's remorse
notwithstanding, there is no immediate exit from
this relationship. It remains a source of
stability and prosperity for both countries. Two
decades ago, China cast its lot with the United
States, and until recently, that has brought it
affluence. Now that things have gotten difficult,
the Chinese want out. But when the heady
intoxication of these weeks wears off, they will
find that they have nowhere else to go. One day, perhaps, but not today.

* Karabell is the author of Superfusion: How
China and America Became One Economy and Why the
World's Prosperity Depends on It (Simon &
Schuster 2009) and president of River Twice Research (www.rivertwice.com)
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