The Future of U.S-China Relations

President Obama and Chinese Premier Hu Jintao

President Obama and Chinese Premier Hu Jintao

While most of the (political) world was transfixed on the spectacle of the health care summit yesterday, the U.S.-China Economic and Security Review Commission was holding hearings on the current and future status of U.S.-China relations. The hearings, which interestingly included testimony from two of my favorite bloggers, Daniel Drezner and Simon Johnson, as well as about a half-dozen other experts, provides a compelling analysis of the challenge of U.S. debt for China.

The basic issue under consideration was the degree to which China, which boasts a massive currency reserve held mostly in U.S. dollars, could leverage its fiscal resources into achievements in its other foreign policy goals. China currently holds at least $755 billion in U.S. Treasury Securities as part of its estimated $2.5 to $3 trillion in dollar-denominated assets. This massive financial reserve was garnered primarily as a result of China running massive trade surpluses with the United States. Ironically, however, those trade surpluses led to a situation of mutual dependence, in which the United States depended on China’s willingness to buy U.S. Treasury certificates and other dollar-denominated assets in order to finance its large trade deficits, which in turn allowed China to continue to increase its exports to the United States.

So what of the future? Sino-American relations have suffered some setbacks in recent months, as witnessed by the Google-China incident, the Obama administration’s decision to move forward on arms sales to Taiwan and meet with the Dalai Lama, the inability of the two countries to negotiate a meaningful outcome at the Copenhagen summit, various bilateral trade disputes, and continued and repeated rumblings in the United States regarding the perceived overvaluation of the Chinese renminbi.

In his testimony, Drezner argued that despite the widespread rumblings about the threat posed by China’s massive trade surpluses, it has generally been unable to covert its massive financial wealth into other foreign policy goals. With the notable exception of a couple of very minor cases (for example, using the promise of aid and assisting in the financing of government debt to Costa Rica in exchange for switching its diplomatic recognition from Taipei to Beijing), the Chinese government has been limited in its ability to use financial resources to achieve other foreign policy aims. The fungability [glossary] of financial power in the international arena is, in this respect, limited.

What’s more, while the Chinese government has expressed a desire to move away from the dollar as the de facto international reserve currency, the feasibility of most alternatives remains limited. China could push harder, but such a strategy would entail considerable costs for the Chinese government and economy, not the least of which includes a devaluation of its $3 trillion in dollar-denominated assets. As a result, it appears the U.S. and China remain in an uneasy situation of mutual dependency, each expressing dissatisfaction with the current political and economic arrangements, but each equally unable to move away from them.

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One response to “The Future of U.S-China Relations

  1. Pingback: The Renewable Energy Rivalry « World Politics News Review

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