Secret Deals Stop America Hitting the China Iceberg

Chinese-American relations have some of the characteristics of an iceberg. The part that is visible is cold — lots of mutual recriminations — and jagged. The greater part, nine-tenths, is submerged, invisible to the naked eye, and far more consequential. This is one area in which what you see is rarely what you get.

Americans have long been miffed at the huge trade imbalance caused by China’s undervaluation of its currency. But the angry congressional voices, and demands that the Treasury secretary label China a “currency manipulator”, have long gone unheard, or at least unattended to, at the White House. President George W Bush and his Treasury secretary Hank Paulson decided that a trade war was not in America’s interest, and instead conducted a Strategic Dialogue with China about the nature of our economic relationship. With the advantages of low-cost Chinese goods obvious to anyone who has been in Wal-Mart, a succession of presidents was able to hold off the protectionists even though the dialogue with China proved to be a dialogue of the deaf.

That was then, and this is now. The recession has caused the question of the US trade deficit with China to merge with the need to create “good American jobs”. All those Chinese goods must, it seems obvious to Democrats in Congress, be putting Americans out of work. Add the fact that Barack Obama is beholden to his trade-union allies for campaign funds and doorstep campaigners, and you have an administration that has to do something if the president’s promise to create millions of American jobs by stimulating high-tech, green exports is to be seen as credible, at least until the facts start rolling in.

Remember: when the worldwide recession threatened to visit China, the authorities there froze the gradual upward drift they had been allowing in the yuan, resulting in an 8% depreciation of the currency. China’s exports and already-growing economy grew faster, and the economies of its trading partners started to sink faster. Pressure for retaliation mounted.

Meanwhile, the Chinese rulers know, because their own central bankers have told them, that their economy is overheating, and that if some coolant is not applied it will suffer an inflationary explosion. China’s exporters trade their dollars for the yuan they need to pay their workers and meet other costs, thereby increasing their nation’s money supply — and by a lot. And they use their earn- ings to expand their plants, increasing the capacity that domestic demand will not absorb, and that will be dumped — oops, sold — on world markets.

Still, trade policy with China cannot be viewed in isolation from broader issues. We are talking about the G2, the superpower and emerging power that have interests in a lot more than trade. America wants China to support sanctions on Iran; China wants America to stop selling arms to Taiwan. America wants China to bring the North Korean nutters to the nuclear negotiating table; China wants America to stop nagging it about human rights. America wants China to allow the yuan to move up in value; China wants America to stop all this talk about currency manipulation, and not raise the subject in the report that the Treasury secretary is legally obliged to make to Congress next week. America wants China to open its markets to made-in-the-USA products and stop stealing the intellectual property of American firms; China wants America to drop tariffs on steel and cheap tyres. Most of all, America needs to reduce the flow of dollars to China lest China’s power over US policy become even greater than it already is.

So the Chinese asked Treasury secretary Tim Geithner to drop by last week after his visit to India. And President Hu Jintao belatedly decided to attend the 40-nation nuclear security summit that opens in Washington tomorrow. That part of the iceberg will be visible to all. Under the surface, there will be other matters to settle.

One of these will be final agreement to have Hu visit Washington this summer, reciprocating Obama’s (humiliating) visit to China in November. Another will be discussions to encourage the Chinese regime to loosen restrictions on its companies’ investments in America. China has already done a few headline-grabbing investment deals here, most recently automaker Zhejiang Geely’s $1.8 billion purchase of Volvo from Ford. It has also dipped its toe in the water with smaller ventures in Georgia (a soy sauce plant), Texas (a few telecoms manufacturers), and Wisconsin (a shopping mall).

Obama would like nothing better than to make a tour of job-creating Chinese investments in key states by the time he stands for re-election in 2012. And the Chinese government is under pressure from its own companies to allow them to enter the lucrative US market, as other American trading partners such as Japan and Germany (think Toyota, BMW and Mercedes) have successfully done.

Of course, the dollar peg will be on the invisible agenda. But my guess is that this problem has already been solved. The Chinese will publicly follow the line taken by China’s premier, Wen Jiabao, who denies the yuan is undervalued and insists that pushing down the dollar while pressing other countries to push up the value of their currencies in order to increase US exports is “protectionism”, which he presumably opposes. That’s the visible part. The part below the surface will involve an agreement by Hu to allow the yuan to appreciate gradually to strengthen Obama’s hand with those calling for more drastic measures, and to satisfy his own central bankers.

In the end, all this is more cosmetic than substantive. If Chinese imports become only a bit more expensive in the US, the effect on trade with China will be minuscule, and the effect on America’s trade balance even less, as consumers switch to the low-cost products of Central American and other countries. But that matters less to Obama than adding what he can present as another victory to his healthcare triumph and the arms control deal with Russia.