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The U.S.-China Relationship: Policy Goals

Author: Esther Pan
November 11, 2005

Introduction

As President George Bush prepares to leave for state visits to Japan, Korea, China, and Mongolia November 15-21, the U.S. relationship with China is coming under increasing scrutiny. China's stunning economic rise has made it a formidable potential competitor to the United States in areas from trade to diplomacy to military supremacy. Yet the relationship is a critical one. "These two very different countries will have to cooperate closely in the decades, indeed centuries, to come," wrote Financial Times columnist Martin Wolf in a September op-ed. And the United States, which has long had special security and trade relationships in Asia, can't take its position in the region for granted. "China has dramatically improved its relations with neighboring countries, particularly in Southeast Asia," says Nicolas Lardy,senior fellow at the Institute for International Economics and an expert on the Chinese economy. As a result, "these countries' foreign-policy positions are now taking into account China instead of the United States," he says. "It's a sea change. The center of gravity has shifted."Below are summaries of some of the most important bilateral issues between China and the United States:

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Trade

China's economy has grown at an average rate of 10 percent per year for the last fifteen years, the highest growth rate in the world. The staggering growth has lifted hundreds of millions out of poverty and transformed an agricultural society into one of the world's most dynamic, industrial markets. Total trade in 2004 was more than $1.1 trillion, making China the world's third-largest trading nation, after the United States and Germany. China today has the greatest openness to trade of any large economy: the ratio of trade to China's gross domestic product (GDP) was 70 percent last year, compared to less than 25 percent each for the United States and Japan. The United States is one of China's largest trading partners, and the two countries have managed their complex trade relationship: They reached an agreement November 8 to limit imports of Chinese textiles from flooding U.S. markets. But tensions are still rising among U.S. officials over the U.S. trade deficit with China, $162 billion in 2004. Protectionist pressures are growing as politicians accuse China of keeping out U.S. exports while flooding the U.S. market with low-priced Chinese goods. But, since the overall U.S. current account deficit is $665 billion, some experts say it's unfair to pin the blame on China for massive U.S. consumption. Bush will stress the importance of trade ties with the region during his visit to the Asia-Pacific Economic Cooperation (APEC) forum in Busan, South Korea November 18-19.

Currency

Anger has been building in the United States over China's alleged manipulation of its currency. For the last decade, China had pegged the value of its currency, the renmenbi, to the U.S. dollar at what critics called artificially low rates. Manufacturers accuse China of undervaluing its currency—which makes Chinese goods cheaper in the United States and U.S. goods more expensive in China—by as much as 40 percent and say the currency rates contribute to the giant U.S. trade deficit with China, projected to exceed $200 billion this year.

In July, mounting pressure caused China to revalue the renmenbi upward by 2.1 percent and change its peg from the dollar to a basket of international currencies. But advocacy groups like the China Currency Coalition accuse Beijing of exercising a deliberate policy to force American manufacturers out of business. They say China is still interfering to keep a fixed exchange rate: Their graph shows that the value of the renmenbi against the dollar has stayed basically unchanged since July. But others say the fuss over China's currency is overblown. The Carnegie Endowment's Albert Keidel writes in this policy briefthat the renmenbi is not undervalued and points out that China has a trade surplus with the United States but a trade deficit with the rest of the world. "Focusing on China's currency is a distraction," Keidel writes. "If the United States wants to improve its economy for the long haul, it had best look elsewhere, beginning with raising the productivity of American workers."

Security

The Pentagon's annual report to Congress on the strength of the Chinese militaryestimated that China currently spends some $60 to $90 billion on defense, two or three times its officially published estimate. The nation has a standing army of 2.3 million, and is in the middle of a strategic and well-funded military modernization plan. China's army could soon legitimately challenge that of the United States, experts say, which has attracted attention and raised concerns worldwide. In a June speech at the International Institute for Strategic Studies in Singapore, U.S. Defense Secretary Donald Rumsfeld questioned China's military buildup. He asked why China is increasing its arms purchases, investment, and deployments when it has no clear enemies and criticized the fact what while China's economic growth has fed its military spending, a growth in political freedom has not followed. "With a system that encouraged enterprise and free expression, China would appear more a welcome partner and provide even greater economic opportunities for the Chinese people," Rumsfeld said.

China has also taken steps to show it is establishing control over security in the region. China—along with Russia, Kazakhstan, Tajikistan, and Uzbekistan—is a member of the Shanghai Cooperation Organization (SCO), which cooperates to address security threats in Central Asia. China conducted its first-ever military training exercises with Russia in August under the auspices of the group. SCO has grown in influence over the past year, and now counts Mongolia, Pakistan, Iran, and India as observers.

China must also be aware of its location. The nation is surrounded by distrustful neighbors —India, Russia, Japan, South Korea, Vietnam—that could unite against it to check its power if it acts too aggressively. Certainly, a Chinese invasion of Taiwan—a constant threat from Beijing to counter talk of independence from Taipei—would draw a strong and possibly punitive response both regionally and internationally. That awareness has contributed to a scaling back of provocative rhetoric on both sides of the Taiwan Strait, experts say. "Tensions seem to have subsided quite a bit," Lardy says. But China still has to walk a fine line on the Taiwan issue, trying to rein in the island's ambitions for independence while reaching out to reassure its neighbors. The debate over whether China is a military threat continues. Richard C. Bush III, director of the Center for Northeast Asian Policy Studies at the Brookings Institution, testified before Congress in September on the impact of China's military modernization on the cross-strait balance of power.

Diplomacy

China and the United States are leading efforts to prevent North Korea from developing nuclear weapons. China hosted the fifth round of six-party talks on the North Korean nuclear issue—with the United States, Russia, South Korea, North Korea, and Japan—held November 9-11 in Beijing. In preparation for the talks, Chinese President Hu Jintao went to Pyongyang for a three-day visit in late October. The visit was seen as both a reward for North Korea's September agreement to give up its nuclear weapons program in return for aid and security guarantees, as well as pressure on Pyongyang to continue its cooperation in the current round of talks.

China is actively pursuing a foreign policy of "peace and development to bring harmony, security, and prosperity to all," the official Xinhua News Service wrote October 1. Wu Jianmin, one of China's top diplomats, told Xinhua September 12 that China was entering a "golden age" of diplomacy, where it has closer ties and better relations with more countries in the world than ever before. In 1971, China had diplomatic relations with sixty countries; today, that number is 160. It is reaching out to its neighbors as part of Beijing's "friendly neighborhood policy." Chinese leaders, including President Hu Jintao and Premier Wen Jiabao, have actively courted friends in the region. In April 2005 alone, they visited Brunei, Indonesia, the Philippines, Pakistan, Bangladesh, Sri Lanka, and Indonesia. This activity is in contrast to the United States, which critics say has neglected important relationships in Asia to focus on Iraq and the Middle East. Bush's Asia trip will last six days; he will spend only two days in China. "For the president to spend so little time in China is almost like [the Bush administration's] checking off a box," Lardy says.
In contrast, Chinese officials have actively wooed new friends and allies. Southeast Asian nations that are members of the Association of Southeast Asian Nations (ASEAN) have responded: Trade between China and the ASEAN nations reached $105.8 billion in 2004. China has also dealt with a longtime border dispute with Russia, established business and diplomatic relations across Africa, and launched the China-Arab Cooperation Forum and the China-Latin American Cooperation Forum to improve relations with those regions.

With its confident new diplomatic posture, China is becoming more assertive. Recently, the SCO pushed the United States to withdraw its troops from Uzbekistan and Kyrgyzstan, reflecting Chinese and Russian tensions over the U.S. military presence in resource-rich Central Asia.

Wu says China's new engagement with the world is paying off. "Increasingly vigorous foreign affairs have made unprecedented contributions to expanding China's influence on the international arena," he told Xinhua. "They have won a peaceful and stable environment for China's development, [and also have helped] support China's economic development."

Energy

China's massive economic growth has caused a corresponding spike in its energy needs. Although much of the international world is focusing on China's increased consumption of oil, most of China's economy is actually run on coal. Some 67 percent of China's energy needs are met by coal, while only 24 percent of its energy consumption is oil. In fact, "China is by no means anywhere near where [the United States is] as oil importers," says Kenneth Lieberthal, a China expert and professor of political science at the University of Michigan. China imported 117 million tons of oil last year, while Japan imported 200 million tons, and the Untied States and Europe imported 500 million tons each, according to the Chinese State Information Center. China consumed 6.31 percent of the total world oil trade, while Japan accounted for 11.3 percent, and the United States consumed a whopping 29.6 percent, according to the National Development and Reform Commission (NDRC), China's economic planning agency.

While China still consumes far less oil than the United States, increased production in industries like steel, aluminum, and cement—which all feed China's export growth as well as its frenetic construction boom—have driven up its energy consumption. In response, China is going around the world to stake out reliable supplies of oil. China has struck energy deals with countries including Uzbekistan, Iran, Sudan, Myanmar, Chad, and Venezuela. China offers powerful incentives for these countries' energy resources: economic and military aid, access to Chinese markets, and support at the United Nations. China wields a powerful veto on the UN Security Council, and has used it to block punitive action against Sudan, for example, over the crisis in Darfur. "It's logical that China will take positions on sanctions" against its energy allies that the United States and other countries might not agree with, Lieberthal says.

China has used soft loans, debt relief, and development aid to strike energy deals in Africa. Its innovative deals also include Chinese construction of roads, bridges, and power stations to critical energy resources, according to the Institute for the Analysis of Global Security, a nonprofit organization that examines the links between energy and security. China has invested more than $8 billion in Sudan, which now supplies over 7 percent of the nation's oil. Some 4,000 unofficial Chinese forces reportedly protect those resources. China has sunk another $70 billion into Iran's oil and gas industry, which now supplies 11 percent of China's energy needs. Experts say these investments—and China's drive to lock down oil resources for itself without regard for the authoritarian regimes that control them—may lead to conflict with the United States in the years to come. "China currently imports 40 percent of its oil needs," Lieberthal says. "By 2020, it'll be importing 70 percent of its oil requirements. That will put new energy demands on the world market and gets China in bed with what America considers bad actors."

Governance

China's Communist-led government is pursuing a policy of ever-increasing economic development while preserving social stability, which translates into a tight rein on political protests or freedom of speech. Recent moves to censor the Internet and punish reporters have led to international protests and demands for more openness.

But Lieberthal says that's not how this government works. The current leadership's formative years were during the Cultural Revolution from 1966-76, he says. That time of great social upheaval caused this generation of leaders to view chaos as the deadliest threat and value stability at all costs. However, maintaining this policy is a challenge during a period of such dramatic change; some 140 million people have moved from rural areas to cities in the last two decades, the largest internal migration in history.

The United States has also had to tread carefully with China. Despite Washington's stated goals of encouraging transparency and anti-corruption initiatives in China, its engagement with Beijing—and the web of significant security, economic, public-health, and trade relationships between the two countries—means the United States is not applying much political pressure to open up Chinese society, Lieberthal says.

Income inequality, corruption, and abuses of power are flourishing along with China's burgeoning economy. The World Bank ranks China in the 40th percentile for its application of the rule of law (100 percent is the highest). The country ranks in the 40th percentile on control of corruption, a significant drop since 1998, when it ranked in the 61st percentile. When judged on "democratic voice and accountability," China fell to the 8th percentile. These factors are contributing to what the Carnegie Endowment's Keidel calls the economic basis for social unrest in China.

It remains to be seen whether the Chinese experiment of market reforms married to a repressive political system can coexist for long. "Can they do it? No one knows," Lieberthal says. "It's one of the biggest gambles in history, and we all have stake in how it turns out."

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