Tough talk won't alter U.S.-China trade

Larry Downing / Reuters

U.S. President Barack Obama speaks at his news conference at the conclusion of the APEC Summit in Honolulu, Hawaii.

By John Schoen

Obama to China: Oh grow up.

China to Obama:?You're not the boss of me.

You can ignore?the recent tough talk between the world?s two economic, military and political superpowers. The economies of China and the United States are so tightly joined, the two countries have no choice but to remain the world?s largest trading partners.

There?s nothing like the threat of a global recession to raise the kind of trade tensions that prompted President Barack Obama?s high-profile scolding of China this weekend for tipping the?scales of international trade in its favor. Even as the presidential campaign heats up the political rhetoric on trade, both sides in the U.S.-China trade relationship just have?muddle their way through.

?We largely have the same interests,? investment guru Warren Buffett told CNBC Monday. ?So it?s not in our interest to start getting really furious with each other. There will be tensions. We'll want to play the game our way, and they'll want to play the game their way. And we'll both have to give in some cases."

The rules of the game of global trade?-- and whether or not China plays by them?-- were the subject of tough talk from the president at a meeting of world leaders Saturday in Hawaii as he began a nine-day swing through Asia to promote trade.

In a session with business executives, Obama said it was time for China to "play by the rules" of global trade and called on Beijing to act like a "grown-up" instead of trying to position itself as an emerging economy. China?s huge trade surplus, Obama said, "throws the whole world economy out of balance."

Chinese officials quickly shot back, saying it was not inclined to play by rules it has no role in writing.

"First we have to know whose rules we are talking about," Pang Sen, a deputy director-general at China's Foreign Ministry, told a news conference not long after Obama spoke. "If the rules are made collectively through agreement and China is a part of it, then China will abide by them. If rules are decided by one or even several countries, China does not have the obligation to abide by that."

Western economies have long argued that China not only breaks the rules, it also tips the entire playing field by artificially undervaluing?its currency to give its exports a boost. Obama cited analysts who estimate that the renminbi is undervalued by 20 to 25 percent.

For their part, Chinese leaders point to a revaluation, begun in 2005, that has boosted the renminbi?s value in dollar terms by nearly 30 percent (including a two-year freeze after the financial Panic of 2008). Letting the currency appreciate any faster, they argue, would risk adding fuel to an already worrisome inflation rate, dampen Chinese exports, force factories to close, raise unemployment and spark wider social unrest.

Obama, fighting to keep?his job for another term, is feeling political pressure at home to talk tough with China.

With?demand from domestic consumers weak, U.S. businesses are eager to get better access to a rapidly expanding Chinese middle class of 300 million people eager to buy western products. A Reuters poll of executives found that more than 40 percent see rising consumer spending power in Asia, especially in China, as their single biggest growth opportunity. But Obama made clear he is hearing complaints from executives about difficulties in gaining fair access to China's markets and about?protecting intellectual property.

?Enough is enough,? Obama told reporters Monday. ?Companies that do business in China consistently report problems in terms of intellectual property not being protected.?

China is the United States? third largest trading partner, behind Canada and Mexico, with roughly $450 billion worth of goods moving between the two countries. But the flow of goods remains?badly lopsided: the U.S. imports roughly four times the dollar volume of goods from China as it exports back into that market. But the Chinese market is growing more rapidly; U.S. exports to China rose 32 percent in 2010. China is the largest buyer of U.S. farm products and a major market for U.S. manufacturers of aircraft, heavy equipment and machinery, and electronics.?

The western world is also looking to China, which now sits on the largest pile of export-fueled foreign reserves in the world, to step up and lend a hand resolving the widening financial crisis in Europe. As European leaders scramble to head off defaults by weaker, debt-swamped economies like Italy and Greece, they?ve been unable to overcome political gridlock to raise the funds to backstop those debts. Unless that gridlock is broken, European banks holding Greek and Italian bonds face heavy losses?if those governments default on their debt. The total tab could come to 4 or 5 billion euros.

But so far, Europe?s Central Bank, the ECB, has been opposed to the kind of ?easy money? policies employed by the Treasury and Federal Reserve when the Panic of 2008 threatened U.S. banks.

China clearly has a dog in this fight. The eurozone, as the world?s second largest consumer market, is one of China?s best customers. So far, China has made clear it wants no role in any European bailout, most recently at a meeting of the 20 largest industrialized countries in Cannes, France.

Chinese officials have also made clear they believe the current crisis is entirely Europe?s own making. They say it's the result of ?the accumulated troubles of their worn-out welfare societies,? according to Jin Liqun, head of China Investment Corporation, one of the sovereign wealth funds European leaders have been hoping would support of a financial backstop.

?Labor laws are outdated, the labor laws induce sloth, indolence rather than hard working,? Jin said in a television interview with Al Jazeera. ?The incentive system is totally out of whack.?

Much as its economy and financial systems are deeply linked with the U.S., China can ill-afford to watch Europe sink deeper into recession and financial turmoil. But it can only play a supporting role in helping the eurozone get back on its feet.

?The solution must come from the eurozone,? said Didier Borowski, head of strategy and economic research at Amundi, a Paris-based investment manager. ?If we had a lender of last resort, no doubt the sovereign wealth funds and private investors would be keen to invest in sovereign debt securities. But without that role for the ECB, we should not expect China to play that role. It doesn?t make sense. They can only help.?

Warren Buffett, Berkshire Hathaway chairman/CEO says the relationship between U.S. and China will be bumpy at times, however the two countries will align interests over time.

Source: http://bottomline.msnbc.msn.com/_news/2011/11/14/8801286-tough-talk-wont-alter-us-china-trade

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