At first, it seemed like Obama's visit to China might actually be fruitful after the People's Bank of China issued a report promising an improvement in the yuan's exchange rate mechanism a few days before Obama's arrival. But this move was posturing, an attempt to lessen discussion on this topic and not a sign of coming compromise.
The truth is simply that on issues such as trade and climate change the US and China have much different incentives. Trade is almost a zero-sum issue. For the US current account deficit to decrease, China's exports must decrease. At the same, pundits such as STRATFOR and some economists have predicted the China will wait for export growth to resume before appreciating the yuan. Naturally an increase in Chinese exports also indicates a larger US deficit. So far, China has been spared from US' current account deficit reduction because of its peg to the dollar, but other countries are unwilling to bare this cost alone for long.
The Obama-Hu joint presser is especially interesting. Reading Hu's statement versus Obama's shows their divergent interests. Though it sounds like Hu and Obama are agreeing, the devil is in the details. On the economy, Hu's statement was
"The two sides reiterated that they will continue to increase dialogue and cooperation in macroeconomic and financial policies, and they will continue to have consultations on an equal footing to properly resolve and address the economic and trade frictions in a joint effort to uphold the sound and steady growth of their business ties and trade. I stressed to President Obama that under the current circumstances, our two countries need to oppose and reject protectionism in all its manifestations in an even stronger stand."Obama, on the other hand:
"Going forward, we agreed to advance the pledge made at the G-20 summit in Pittsburgh and pursue a strategy of more balanced economic growth -- a strategy where America saves more, spends less, reduces our long-term debt, and where China makes adjustments across a broad range of policies to rebalance its economy and spur domestic demand. This will lead to increased U.S. exports and jobs, on the one hand, and higher living standards in China on the other."The US-China relationship is often called a "mutual hostage situation" or Mexican standoff, where both parties have a gun pointed to the other party's head. While this may apply to the value of the dollar and China's reserves, what is often excluded from this analogy is that China still has the upper hand in this situation. Though the worst case scenario is as bad for China as the US, the stalemate scenario, which is the only option in this case, still benefits China because its currency is undervalued. While both parties are equally unlikely to pull the trigger, China has much more incentive to stay in the headlock.
Another aspect evident during Obama's visit is the inability of Chinese policy to be moved by domestic sentiment. In some places, Obama, America, or Western ideals don't resonate with the population. For example, in Eastern Europe, these factors can affect public policy, which generally furthers US interests. However, in Russia and China, these forces have little to no effect. One important commonality between Russia and China is their influence over the media, limiting the effect of these forces. For example, both Russia and China refused to publicly air Obama's town hall meetings during his visits.
One question that is often on my mind (and that has become a central theme of this blog) is how can Obama deal with two contradictory missions? On the one hand, one of Obama's main selling points during the campaign was his ability to change America's place in the world by embracing diplomacy and multilateral solutions. At the same time, Obama must contend with the realities of geopolitics, which dictate that each state will act to maximize their position. Countries like China have little incentive to engage Iran because there is no upside. But, since Iran is China's 3rd largest supplier of oil, there is a large downside. It is difficult for Obama to find leverage in cases like China-Iran to change a country's policy while still maintaining the positive world image. It is the catch-22 of Obama's foreign policy, and so far there is little hope for change.
Update: Martin Wolf's new op-ed addresses this topic and is a must-read.
