Devil's in the details

PUBLISHED : Tuesday, 28 July, 2009, 12:00am
UPDATED : Tuesday, 28 July, 2009, 12:00am

The China Business News encircled the photos of US Commerce Secretary Gary Locke and Energy Secretary Steven Chu with the yellow-coloured label 'banana' - a derogatory term meaning 'yellow' on the outside but 'white' on the inside - in an article as a precursor to the Strategic and Economic Dialogue this week in Washington. The Chinese state media has been turning up the ethnic and nationalist tone in the run-up to this critical meeting, at a time when a positive atmosphere is needed.

Previously labelled the Strategic Economic Dialogue, it was initiated by former Treasury secretary Henry Paulson, who, as an ex-Goldman Sachs chief executive, wanted a channel for opening China's capital markets and foreign exchange regime that was compatible with American corporate interests.

The dialogue has become complicated under President Barack Obama's administration. Treasury Secretary Timothy Geithner and Secretary of State Hillary Rodham Clinton are vying for control of the China turf. This, then, is the first round of the Strategic and Economic Dialogue, expanded to include matters such as North Korea, greenhouse-gas emission controls, trade deficits and protectionism. Given Mrs Clinton's recent spat with North Korea, China will have the upper hand, at least at the start of the talks.

As a warm-up act, Mr Locke and Dr Chu arrived in Beijing to discuss slapping a future carbon tax on Chinese imports. The US congressional Clean Energy and Security Act taxes imports from nations not adopting energy and environmental standards. Last week, China rejected the tax outright, deriding it as a disguised form of protectionism, in violation of World Trade Organisation rules. While it would be best for both nations to unveil complementary energy and carbon-emissions-reduction laws and programmes before the climate summit in Copenhagen, the tone of this dialogue may mean that a positive result is unlikely.

One of the pillars of Mr Obama's stimulus package is investment in renewable and new energy sources, involving capital for green technology. While China also recognises the environmental problem as a priority in principle, its greatest concern is political stability, which Beijing believes can be assured only through high growth. This means continued industrial output to keep growth rates above 8 per cent, requiring vast energy imports. So, for the time being, carbon dioxide emissions, polluted skies and waters will be an inevitable part of China's formula for political stability. If the US wants to change this, China will demand to be allowed to buy the very technology that Washington refuses to sell.

While the shape and form of our future global financial system will be discussed as a matter of priority, rest assured that no blueprint will follow this round. Lofty talk of what the post-Bretton-Woods world should look like, with China as a major player, will dissipate into empty promises from Mr Geithner that China's assets are safe with America. China, in turn, will be vague on any commitment to continue buying US Treasury bonds, even if it probably has no other choice, at least for the moment. Like his commerce and energy colleagues, Mr Geithner recently visited Beijing with a warm-up act of his own - one that resembled an investment bank roadshow selling a new fund product.

Now Beijing is calling for structural adjustment in America. More than half of China's US$2.1 trillion worth of foreign exchange reserves is parked in US Treasuries. The question for China's central bank is whether to continue buying US debt or not. If it buys, it will be paying for Mr Obama's stimulus package, which in theory should boost US consumption, in turn reviving China's exports, and beefing up further its foreign exchange reserves. If China refuses to buy, Mr Geithner will turn on the printing press and the US dollar could go down the route of the Zimbabwean dollar. Then, China's assets would be worthless. Perhaps Americans will continue to consume, but at a much greater price.

Laurence Brahm is a global activist, international mediator, political columnist and author. For more information see