The Dog That Didn't Bark Opens One Eye

The Obama campaign spent more time and energy on foreign policy than is typical, particularly for a Democrat. It’s especially striking, therefore, that nearly all of this energy and time was devoted to what we might call the Atlantic world (Europe, Africa, Middle East) and nearly none of it to the Pacific world. The same bias was notable in the Inaugural. Obama seems to have a pretty clear set of views on Iraq, Iran, Pakistan – the “arc of crisis” region. You can agree or disagree with those views, but he’s reasonably well laid out what they are. But what is the Obama Administration’s view of America’s most important bi-lateral relationships – the trans-Pacific relationships with China and Japan?

China was the dog that didn’t bark in the Bush Administration. Before 9-11, there was a bit of a reason to fear (or hope, if you’re Bill Kristol) that the Bush Administration was gearing up for a confrontation with China. There was that business about committing to the defense of Taiwan, the incident with the American pilot being forced down – little things, but they could have been signs of something more ominous. But as things played out, trans-Pacific relations were quite tranquil. If you’re on the left, that’s because of benign neglect – Bush was too busy screwing up the rest of the world to screw up our relationship with China. If you’re on the right, that’s because America’s wars in Afghanistan and Iraq had a “sobering” effect in Beijing. Wherever you are, though, it’s notable that the dog didn’t bark.

Well, the Obama Administration appears to be coming in with no particular plans or perspective on China. This has James Fallows nervous that Geithner is going to needlessly antagonize China, that Congress is going to demonize them for our economic woes and respond with protectionism, accusations of currency “manipulation,” etc. I’m kind of worried about the opposite.

What’s kept Sino-American relations on an even keel all these years, after all, has been profound mutual interest. China’s export-led development path meant keeping their currency artificially low, and their living standards artificially low as well, by investing their surplus national savings in Treasuries. As a result, we owe them a lot of money. But, unlike your typical global deadbeat, we owe it to them in our own currency, which means the lender has far less power to put the screws on the borrower, as the borrower can always respond by trashing the currency. Not only was it in the Chinese interest to keep the game going because it benefitted their export industries, it was in their interest to keep the game going to protect the value of their enormous investment in dollar-denominated assets.

Now, though, with the deepening global economic crisis, China is going to be spending a lot more of their savings at home rather than shipping it overseas. If they cannot count on the American consumer, they will need to reinvent him. That will necessarily mean a significant revaluation of the Renminbi upward against the US dollar. It’s in both Chinese and American interest for this revaluation to take place in an orderly fashion rather than see a sudden collapse of the dollar. But that will not be an easy thing to pull off (currency devalutations rarely are).

Geithner’s comments are concerning not because they suggest he doesn’t know how to talk nicely to China. They are concerning because they suggest that he doesn’t know where the biggest risk to America lies – not in the risk that China will try to keep the Renminbi weak, but that it will be unable to stop it from rising way too fast. In other words, the risk is not that America will annoy China by calling them “manipulators” of their currency but that they’ll decide to give us what we ask for and stop “manipulating” their currency.

And it’s concerning because if the fundamental drivers of the trans-Pacific relationship are unraveling, then we need a really good team in place to manage that transition. And I trust James Fallows: if he doesn’t think they’ve got a good team in place (apart from the Energy Secretary), they probably don’t.