As fears of a prolonged recession grow, so does the need to stabilize U.S. economic relations with China.
Beijing’s undervalued currency exchange rate against the dollar subsidizes a torrent of Chinese imports that cost U.S. jobs. More important, the U.S. budget deficit would no longer be sustainable if China were to cut back its massive holdings of U.S. Treasury securities.
With Congress threatening legislation to block Chinese imports, the danger of economic warfare is growing. The Obama administration is promising further dialogue. But it has poisoned the atmosphere for negotiations with recent military moves in Taiwan, the Yellow Sea and the South China Sea that have outraged Beijing.
The conventional wisdom is that the way to get Beijing to move on the key exchange rate issue is by curbing a wide range of imports to show that Washington is not afraid of a trade war. Maybe so. But another option would be to combine congressional pressure with diplomatic initiatives to probe Beijing’s recent signals about a “grand bargain” linking economic and security issues.
Chinese diplomats say privately that China would be more cooperative on trade, the exchange rate and the U.S. debt if Washington would be more sensitive to Chinese security concerns.
Just before President Hu Jintao’s June visit to Washington, Li Daoling, a member of the China Central Bank Policy Committee, laid this out in a Financial Times interview. “Everything else will be easy to handle,” Li said, if the United States would respect China’s “core interests” in the areas around its periphery — especially Taiwan.
The Taiwan issue has been heating up since late January, when the Obama administration, over Chinese protests, sold $6.4 billion in arms to Taipei. To appease Beijing, the administration excluded a pending $5 billion package of 66 F-16 fighter jets that Taipei has been seeking for the past decade. Indeed, Chinese sources have revealed that Hu agreed to attend the nuclear security summit only after the White House promised that it would not make the F-16 sale for the remainder of 2010.
The Pentagon’s renewed campaign for the F-16 deal now makes clear it is far from dead. Pointing to a Defense Intelligence Agency study downgrading the capabilities of Taiwan’s air force, Adm. Robert Willard, U.S. commander in the Pacific, warned that Taipei needs “to keep pace with China’s increasing air power,” and on Aug. 17 the Defense Department emphasized in its annual report to Congress that “the balance of cross-Strait military forces continues to shift in the mainland’s favor.”
Beijing has signaled its unease with U.S. naval exercises in the Yellow Sea — a leading Chinese scholar compared it to the Soviet Union’s 1962 deployment of nuclear-armed missiles in Cuba — and recent high-level U.S. statements that seemed to challenge Chinese hegemony in the South China Sea.
For example, on July 23, Secretary of State Hillary Clinton called for impartial adjudication of disputes between China and Southeast Asian states over petroleum-rich areas of the South China Sea. But the furor over these statements has died down, and the Taiwan arms sales issue now dominates U.S.-China relations.
Why does China care so much about arms sales to Taiwan?
It is not because Beijing is plotting to conquer the island militarily, as supporters of arms sales argue. Rather, Beijing blames Washington for delaying a peaceful transition to “One China,” which has been gaining support in both China and Taiwan through burgeoning economic interchange. “Vested interests in Taiwan will resist unification so long as they have support provided by your arms sales,” Li Shenzhi of the Chinese Academy of Social Sciences said.
Viewed from Beijing, Taiwan has been a compelling nationalist priority since the Qing Dynasty was forced to cede it to Japan in 1895 as the price for ending the Sino-Japanese War.
Just as past humiliations in Taiwan symbolize the impotence of earlier regimes, in the Chinese perspective, so reunification would demonstrate that a strong China has arrived on the world stage.
Beijing repeatedly reminds Washington that arms sales to Taiwan directly violate the August 1982 Second Shanghai Communique, in which the United States declared that it “intends gradually to reduce its sales of arms to Taiwan, leading over a period of time to a final resolution.”
But arms sales supporters insist that the 1982 agreement conflicts with the 1979 Taiwan Relations Act, which authorizes the United States to provide weaponry “to enable Taiwan to maintain a sufficient defense capability.” But what was “sufficient” in earlier decades is overkill in the present economic and political thaw. As Adm. Bill Owens, former vice chairman of the U.S. Joint Chiefs of Staff, recently said, the Taiwan Relations Act is now “doing more harm than good. A thoughtful review of this outdated legislation is warranted.”
One way to move forward on the currency stalemate would be for the administration to make clear to Beijing that the F-16 deal is in the deep freeze and that the president will look for congressional support to modify the Taiwan Relations Act, acknowledging that the need for arms sales will decline if the current thaw between Taiwan and China continues.
In return, Beijing would be expected to take significant steps to revalue the renminbi and ease fears generated by its recent sale of $14.8 billion in Treasury securities. Beijing is still the largest foreign owner of U.S. debt with $803 billion in U.S. Treasury securities.
The danger that China will sell off these holdings in a future crisis should not be underestimated and underlines the growing urgency of a grand bargain.
Selig S. Harrison covered China and Taiwan as northeast Asia bureau chief of The Washington Post. He is the author of “China, Oil and Asia: Conflict Ahead?” and “The Widening Gulf: Asian Nationalism and American Policy.”