US-China ties warmer, but not for long
Everything seems suddenly to have become rosier in US-China relations. Three weeks ago Treasury Secretary Tim Geithner, on his way back home from a trip to India, made a seemingly unscheduled visit with VicePremier Wang Qishan.
Days before, the US Treasury decided to postpone a report that might name China as a currency manipulator. Meanwhile, that same week, President Hu Jintao said he would attend the nuclear security conference in Washington in mid-April after a reportedly friendly one-hour telephone conversation between him and President Barack Obama.
The relationship between China and the US, after several very difficult weeks of bluster and name calling, seems suddenly to have improved. Just weeks ago each side was accusing the other of protectionism and threatening retaliation.
In early April, 130 angry US congressmen sent a letter to the US Treasury and Commerce secretaries demanding action against China. Chinese Commerce Minister Chen Deming responded by warning that the US would suffer more than China in a trade war - apparently unaware that historical precedents suggest that trade-surplus countries are always the most vulnerable.
After all the rage, nearly everyone welcomed the improvement in the atmosphere.
It is widely agreed that the increasingly bitter argument over the role of China's currency peg in the global imbalances would not make an adjustment easier.
There is little question that some countries, most notably the US and China but also Japan and some in Europe, have allowed domestic imbalances to get out of hand, and that the process of global and domestic rebalancing is going to be slow and difficult.
If the rebalancing occurs in an acrimonious way, with each country trying to shift as much of the burden onto its trade partners, the outcome is almost certainly to be a period of much slower global growth and much more difficult adjustment.
A grand bargain among the major economies at the source of the imbalances - Germany, Japan and China on one side, and the US and the rest of Europe on the other - in which each country commits to gradual rebalancing is in everyone's interest.
But as much as it may make sense, don't expect it to happen, and don't expect the improved climate to last. It is very unlikely that the major players will be able to arrive at a grand bargain because none of them so far is willing to acknowledge the adverse role of its own domestic policies, and each is much more comfortable insisting that most of the underlying distortions are caused by policymakers elsewhere.
The biggest problem is likely to be over the timing of an adjustment, and there is, it seems, little room for compromise.
China's manufacturers will take many years of weaning off the implicit interest rate and currency subsidies they receive before they can be profitable without them, but as long as Beijing keeps interest rates low and the currency undervalued, it will be nearly impossible to eliminate the trade surplus.
In the US, as long as consumers were able to borrow recklessly and boost domestic consumption above domestic production, unemployment was low and the trade deficit did not matter politically.
But now with consumer debt declining and unemployment very high, we will see, as we have many times before, that high trade deficits are politically incompatible with high unemployment. Unless unemployment declines quickly, US households will demand a rapid adjustment in the trade deficit.
US demands for a rapid adjustment, added to similar demands from the major deficit countries in Europe, will inevitably clash with the inability of China (and Germany) to adjust quickly.
The long brutal adjustment process that Japan has undergone over the past two decades shows just how difficult it is to wean a country off an addiction to overinvestment and trade surpluses.
American impatience will clash with China's glacially slow policymaking.
The fact that both countries face important leadership changes in the next two years will not make the process any smoother. We should all hope that the current thaw in US-China relations lasts a long time, but we should prepare ourselves for a rapid return to acrimony.
Michael Pettis is a professor of finance at the Guanghua School of Peking University and a senior associate at the Carnegie Endowment