Obama’s Lapse in the Preliminary Round of Diplomacy with China

Tim Geithner, the United States Secretary of the Treasury, made a strong accusative testimony on the “manipulation” of Yuan by the Chinese government as he responded to questions on Sino-U.S. trade posed by the Senate last Thursday. He added that the Obama administration would “use aggressively all diplomatic avenues open to him to seek change in China’s currency practices.”

The Chinese Ministry of Commerce rebutted his testimony instantaneously and warned that such rhetoric would fuel trade protectionism which would be detrimental to resolving the issue. A day after Geithner’s declaration, the mid-exchange rate of Yuan for US dollars fell slightly by 7 basis points compared to a day ago. Be it coincidental or “manipulated”, this depreciation of yuan carried with it elements of pointedness and defiance. Two days ago, the Chinese Premier Wen Jiabao spoke at the World Economic Forum at Davos. While he did not comment on Giethner’s statements directly, he did make it clear that no winner could emerge in any Sino-U.S. conflict.

Just as Geithner’s commentary invited swift rebuttal from the Chinese, the international finance market was also alarmed. London-based Economist magazine wrote “investors shuddered at the prospect of a Sino-American spat.”

Noticeably, the mainstream international financial papers, rather one-sidedly, reprehended Geithner’s stand on China. The U.K.’s Financial Times suggested that “the U.S. obsession with the bilateral exchange rate is misguided”, and described Geithner’s action as “playing with fire.” The Economist also criticized, saying that “with the global economy in its most dangerous circumstances since the 1930s, rising Sino-American tensions is the last thing anyone needs.”

Geithner is a celebrity member of the Obama team, who is rich in experience, yet young. He is attracting considerable attention and expectations of him are running high. He won accolades from all corners for his involvement in the creation of the economic rescue package under the Bush administration in the capacity as the president of the Federal Reserve Bank of New York. Geithner has good connections with the top officials and business circle in China and he is said to be a Mandarin speaker. After his predecessor Paulson, he has been widely viewed as another China expert and Geithner’s appointment excited many in the Chinese media who sang lavish praise for the man.

Geithner’s experience as a financial expert is beyond doubt. However, he is not a financial professional, but a core cabinet member of the government of the United States. In his current capacity, he has to face not only economic problems but also complex issues with international politics, economics, trade, and diplomacy interwoven.

Obviously, Geithner needs to improve and build up his sensitivity to international relationships and shrewdness in handling diplomacy matters as needed by a politician. He revealed his recklessness and lack of depth in being insolent, to the extent of haughtiness, on his first appearance at the political stage.

The U.S. and China are the world’s No. 1 and No. 3 economic bodies respectively. They are dependent on each other and are also largely responsible for the recovery of the world’s economy. More than anytime before, both countries need to work with each other, although there is marked difference between the two. Geithner, before he even took over as the Treasury Secretary, erected such a contemptuous posture towards China, a key potential partner, got hit back, and left himself with no room for backpedaling. If he carries on with this attitude, how is he going to deal with China in future?

What is the thinking behind Geithner making such comments which so ignited China? From an angelic angle, there could be two possibilities. One possibility is that he is playing to some anti-China Senate in order to win their support for his appointment at the treasury.

Another possibility is that Geithner might not have removed his “on-the-stump” thinking hat and simply languidly repeated what Obama said during his campaign to delight some of the voters. Subseqently, the White House spokesman has tried to clarify. He hedged Geithner’s statement that China was manipulating its currency and claimed that a formal decision had yet to be made.

However, just as some media has analyzed, if this commentary signals a change in the U.S.’ China policy towards a harder line, it would cause worldwide anxiety over the Sino-U.S. trade relationship and the outlook of the world economy. China is not likely to remain silent about the American accusation and it is likely to retaliate using any tough measures taken against it by the U.S. Should these two economic giants pick up the fight, the battered global economy would be dealt a second blow and the so-called “responsible interested party” would become an international laughing stock.

As this spat was initiated by the U.S. there is a need to look at American China policy more closely.

Firstly, as a rule, hiccups in the Sino-U.S. relationship will come whenever there is a change in power in America. This time round, Obama has been more cautious and steadfast in that he did not make excessive agitating and opposing rhetoric against China. This has raised hopes that the Sino-U.S. relationship could have a smooth transition.

Unfortunately, after Geithner fired a surprise first shot on China, people figured that the Obama administration remains hazy on its key diplomacy policy. Geithner sounded very certain that the Obama administration branded China as a “currency manipulator” when he addressed the Senate. However, after China’s strong rebuttal, the White House spokesman quickly fought the fire and declared that there was no conclusion on the Chinese currency policy as of yet. Who is representing the American government? Who calls the tune on China policy? To date, it is not very clear.

Secondly, the American politicians have made it a habit to reprimand and attack China over the slightest things. Such accusations will be made as long as they fit the political needs and are “politically correct”, regardless of their consistency with what is happening on the ground. These politicians disregard the feelings of the receiving party and do not bother with the repercussions of their actions.

But, times are different. American senior officials who have accused China could face strong reactions from the Chinese authority and could end up paying a heavy price for what they say. Geithner, in his position as a senior cabinet member, called China a “currency manipulator”, a term with legal implications. Even the gung-ho Bush administration avoided branding China with this term over the past eight years. The reason is straightforward – concerns over China’s retaliatory measures.

As the Obama administration has just taken the stage, its young officials have no idea about the level of complexity in Sino-U.S. relations and they have no exposure on the depth, severity, and trade-off involved. Such inexperience, coupled with the long-standing disdain against China, prompted these officials to do things their ways, thinking that they could get away with it. Its result: Geithner was labeled “playing with fire” and “flippant” by the media and suffered a dent in his public image.

Thirdly, when China and the U.S. entered into trade disputes in the past, it was kept a bilateral issue with minimal implication on other countries. The world paid little attention to how these disputes would be settled.

Now, the difference is that actions taken by either country will have an impact on the economic interest of other countries and even the whole world. The U.S. government has always warned that it would resort to protectionist measures to reduce its trade deficit with China. Should it continue with this threat, not only would China defy, but other countries would also reprimand this action.

As mentioned above, China and the U.S. are such gigantic economic powers that any mistakes in decisions and action on their part would bring down the world economy, especially during times like this. Therefore, both countries should regard and handle their bilateral trade disputes with due consideration to the world economy because their problems could be escalated into world issues in the end.

Back to the hoo-ha aroused by Geithner’s remarks, it could be taken as a lesson for other officials on the Obama team. In such a powerful country, any official’s sensitive comment on another important country would have its consequences. In this particular incidence, the Obama administration has been pushed into a reactive mode. The White House has no choice but to offer an explanation. It will take lots of deliberation before anyone would want to call China the name “currency manipulator” again.