The Economic Dimension of China-US Relations

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Context

200_Asean_Defense_Meeting(1)On September 30, the US house of Representative voted to increase tariffs on goods imported from China. The vote passed in the house 348 to 79, but the bill, aimed at punishing the Chinese policy of keeping the yuan undervalued, has an uncertain future in the Senate and ultimately in president Obama’s hands. Meanwhile, China has suspended the export of Rare Earth Elements (REE) to Japan. This article examines the escalating economic dimension of the international rivalries.

Analysis

300_senkaku(1)Economics has dominated US-China relations in the last couple of weeks. With the US’s economy continuing to run slow, China’s currency policy have been a thorn in the works. The China-Japan dynamics has also impacted on US-China relations, as has the series of war games the US has undertaken with South Korea in recent weeks.

The US feels that imposing tariffs may give them greater leverage to pressure the Chinese into changing their currency policy while at the same time making Chinese goods less attractive in the US, and creating more manufacturing jobs at home. However there is also the issue of China’s being one of the US’s biggest foreign creditors, so pushing them too far is also not an option.

he EU and the US have used thet EU-Asia summit last week in Brussels and G7 and IMF/World Bank talks in New York to try and convince the Chinese to allow the yuan to appreciate naturally in the market. The upcoming November meeting of G20 in South Korean would cover further discussion on this topic. The EU and American officials contend that their recovery from the recession would be considerably slow without economic and monetary cooperation of China.

The Chinese are showing no signs of bowing to the pressure, especially since the US is taking monetary easing policies of their own to try and devalue the US dollar; Beijing is rather skeptical at the ‘do as we say, not as we do’ rhetoric coming out of Washington.

With their economic entanglement forcing a degree of politeness between the two rivals, geopolitical issues between China and Japan have nevertheless been putting additional pressure on the already fraught US-China interactions. A recent round of joint war games that US and South Korea held together in the Yellow Sea, has angered China. The defense ministers of US and China finally met today in Vietnam, at the ASEAN Defense Ministers meetings. The military relations of US and China have remained tense since US approved $6.7 billion of military aid for Taiwan, and President Obama met Dalai Lama, earlier this year. Side talks were also held between Japan and Chinese officials and there are signs that the military aspect of the tension may be easing but the economic dimension is escalating.

China produces 95% of the global supply of REE, and it and has suspended the supply of it to Japan since the collision between a Chinese fishing vessel and two Japanese coast guard boats near the disputed Senkaku islands, located in the East China Sea.

REE’s are used in petroleum refining, computer laptops and other electronic gadgets, production of green energy, and defense equipment. Other suppliers of REE include Australia, India, Russia and Malaysia; however, they would be unable to meet the demand in the short term, and thus increasing the monopoly of China in this regard.

China seems to be applying an economic leverage against Japan similar to how Russia has used its energy advantage over Europe. Pakistan also recently applied a comparable tactic when it temporary closed one of the supply routes for NATO forces in Afghanistan. In evaluating the future of Iran-Pakistan Gas Pipeline Project, PoliTact presented the following three factors, which remain valid to understand the politics around the leverage game:

1. Which countries have the gas and energy reserves?
2. Which countries have the most need for these energy reserves, for future development and ambitions?
3. The intermediate countries whose strategic location relative to these energy reserves increases their leverage vis-a-vis the global and regional powers.

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