Obama's China Visit Yields Little Progress

As China's leaders accuse the U.S. of protectionism, it's unlikely Washington will get satisfaction on the yuan anytime soon

By Dexter Roberts

President Obama in the Forbidden City on Nov. 17, 2009. Frederic J. Brown/AFP/Getty Images

In Beijing's cavernous Great Hall of the People on Nov. 17, Chinese President Hu Jintao tried to emphasize how much he has in common with U.S. President Barack Obama. From climate change to nuclear nonproliferation, "China and the United States share extensive common interests and broad prospects for cooperation on a series of major issues important to mankind's peace, stability, and development," said an unsmiling Hu. Obama focused on common ground, too. "We meet here at a time when the relationship between the United States and China has never been more important to our collective future," Obama said, The two leaders released a lengthy joint statement calling for more collaboration on agriculture, global health issues, and counter-terrorism, as well more student exchanges and broader military cooperation.

The trouble is, rather than showcase mutual economic interests, the Obama visit seems to be demonstrating the yawning differences between the two sides on issues such as how best to strengthen global trade or improve the lopsided U.S.-China trading relationship. The American trade deficit with China stands at $165.8 billion so far in the first nine months of 2009, down 16% because of the global economic slowdown. (The deficit has risen to $22 billion in September from $20 billion in August, however. Nor has the deficit declined as much as with other trading partners, such as Japan.)

China's Tougher Trade Stance

When it comes to trade, China and the U.S. are going their separate ways. China has been pursuing a series of trade agreements throughout Asia independent of the U.S., raising concerns that Beijing could eventually supplant Washington as the strongest economic player in the region.

China, soon to become the world's second-largest economy, has also become increasingly outspoken in criticizing the U.S. for what it calls trade protectionism. Indeed, even as Obama was arriving in Beijing from Shanghai, China's commerce ministry was taking the U.S. to task for backsliding on economic openness. "We've always known the U.S. and the West as free-market economies. But now we're seeing a protectionist side," said Commerce Ministry spokesman Yao Jian, citing 10 separate trade actions, including those against steel pipes and auto tires, that Washington has taken against Beijing this year. Yao also criticized continuing U.S. restrictions on high-tech exports to China.

Hu raised the issue in his joint appearance with Obama. "Our two countries need to oppose and reject protectionism in all its manifestations," the Chinese president said.

A newly assertive Beijing is also expressing deep concern about the vast U.S. budget deficit and the sliding value of the U.S. dollar. China went public with its concerns earlier this year, when premier Wen Jiabao proclaimed in March that he was "worried" about China's vast U.S. dollar holdings, which make up the majority of its more than $2 trillion in foreign exchange. China's top banking regulator weighed in on Nov. 15, the day of Obama's arrival in Shanghai, saying that dollar depreciation, plus Washington's unwillingness to raise interest rates, was fueling asset bubbles in stocks and property markets and putting economic recovery at risk. The U.S. policy is creating "new, real, and insurmountable risks to the recovery of the global economy, especially emerging-market economies," China Banking Regulatory Commission chairman Liu Mingkang said in Beijing.

U.S. Denies Protectionism

U.S. officials accompanying Obama have been equally forceful in rebutting Beijing's charges. Appearing at a lunch before American businessman active in China, U.S. Commerce Secretary Gary F. Locke argued that less than 4% of Chinese exports to the U.S. are affected by trade restrictions, roughly equivalent to the percentage of U.S. exports to China that face sanctions. "The United States is not engaged in some increased protectionism. The president is very much against protectionism," Locke said, adding that Washington was considering revising its high-tech control regime affecting China. U.S. Trade Representative Ron Kirk, appearing at the same lunch, chimed in, saying the U.S. had the most open markets in the world.

Obama and other U.S. officials have focused their message during this trip on encouraging China to boost consumption, primarily by restarting the stalled appreciation of the yuan. That will make up for the drop in U.S. spending power as well as help redress the trade imbalance. Both sides agreed to "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," Obama said during his joint appearance with Hu. "I am pleased to note the Chinese commitment, made in past statements, to move toward a more market-oriented exchange rate over time," he added.

But as the China visit winds down, it is increasingly clear that Washington is unlikely to get real satisfaction on the yuan in the near future. Hu pointedly did not mention currency liberalization at all during his speech. And even if recent market speculation of a possible one-off Chinese revaluation proves correct, it is unlikely to be a substantial enough appreciation to seriously affect the trade deficit. Since last July, Beijing has nearly frozen the value of the yuan in part to help its exporters weather the global financial downturn. Lofty statements of common interests aside, the all-important Sino-U.S. economic relationship is certain to be defined by friction as much as cooperation for a long time to come.

Roberts is BusinessWeek's Asia News Editor and China bureau chief.

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