China-U.S. Tensions: What, Me Worry?

A few weeks ago Rachel and I wrote an analysis that argued a “lull in the cycle of diplomatic summits and visits since the Copenhagen meeting” was one of the main factors driving the recent U.S.-China hysteria. China was undergoing a diplomatic reshuffle, and U.S. negotiators on a variety of issues simply didn’t know who to talk to. There were no scheduled high-level bilateral meetings, so both used the lull to turn toward domestic political pressures.

But now China has appointed its new ambassadors, and, lo and behold, they are willing to sit down with their U.S. counterparts on Iranian sanctions. What’s more Hu is coming to Washington for Obama’s nuclear summit, just like we said he would.

Sure, the U.S. Trade Representative issued a report on the same day complaining about China’s nontariff barriers to trade, but that’s part of the “new normal” in geopolitical balance, we argued in the analysis. China is entering its political cycle ahead of the 2012 Party Congress that will appoint the next generation of leaders. U.S. unemployment is persistently high in a midterm election year. Acting tough for a domestic audience is the dominant strategy for both players, but this is not a single level game. Given the uncertainty of geopolitical shift following the credit crisis, Beijing and Washington can be expected to probe for new areas of leverage, but this isn’t a reason to panic (especially for Washington, which still has the agenda setting power in the relationship).

China and the U.S. can cooperate and compete at the same time. Both know the general limits to which they can push the competition, and both understand the limited benefits of cooperation. My boss recently wrote that the odds of the U.S. labeling China a “currency manipulator” in the forthcoming Treasury report were approaching 50/50. Given Hu’s coming visit for Obama’s pet project of ridding the world of nuclear weapons, the upcoming S&ED in Beijing, and China’s apparent strategy of dragging its feet but not drawing a line in the sand on Iranian sanctions, that’s still a bet I would take.

All rights reserved, Roubini GlobalEconomics, LLC. Opinions expressed on RGE EconoMonitors are those of individual analysts and may or may not express RGE’s own consensus view. RGE is not a certified investment advisory service and aims to create an intellectual framework for informed financial decisions by its clients.