Presidents Hu and Obama in Beijing Tuesday. Source: www.lepoint.fr

Presidents Hu and Obama finished their summit in Beijing and issued a joint statement.  Below, Christiaan Tuntono of CSFB notes that President Obama didn’t get a commitment from China to revalue the RMB against the U.S. dollar, which would effectively increase Chinese demand for U.S. exports.  As RMB undervaluation is a key focus of such Congressional China-bashers as Senator Chuck Schumer, President Obama may return home perceived as being soft on China.

As caretakers of not only the planet’s most populous nation (and third largest economy), but also of a 5000-year old civilization, China’s leaders study history.  Not that they always learn the right lessons.  What they learned from the Asian financial crisis of the late 90’s was that a country must hold a fortress of foreign exchange reserves, so as not to be at the mercy of international capital.  The likes of Korea, Thailand and Indonesia were made to grovel at the feet of the IMF because they ran out of fx reserves. 

Likewise, Tuntono suggests that what China learned from 1985 Plaza Accord on exchange rates was not to give in to pressure to revalue your currency.   At that time, the U.S. economy was floundering in part due to a strong U.S. dollar.  So, Japan agreed to bolster the yen, allowing a depreciation of the dollar, in order to reduce the U.S. trade deficit and jumpstart the U.S. economy.  Consequently, recessionary conditions in Japan led to a loose monetary policy, sparking Japan’s asset price bubble and ultimately a decade of stagnation.  China hopes to avoid the same by resisting calls to strengthen the RMB.  With so many U.S. treasuries in the bank, China is in a good position to just say no.

From CSFB November 19, 2009:

Christiaan Tuntono
+852 2101 7409
christiaan.tuntono@credit-suisse.com
The China-US joint statement mentioned neither the RMB exchange rate nor China’s commitment to purchase US Treasury securities, suggesting that the two sides may not have reached consensus on these contentious issues. US President Obama concluded his visit to China on 18 November and released a joint statement with China President Hu Jintao the day before to highlight the consensus reached during this visit. The statement under the “economic cooperation and global recovery” section seems to be in line with the existing economic policies pursued by the two sides, but the lack of mention of the RMB exchange rate seems to suggest that the two sides continue to disagree on this issue. Under the economic section, China promises continued adjustment on economic structure and to raise the contribution of domestic demand to its growth. The US pledges it will increase national saving, promote non-inflationary growth, and return the federal budget to a sustainable level. In our view, the promises suggest that China will gradually decrease its reliance on exports, while the US will protect the safety of China’s investments. The lack of reference to the RMB, despite what was widely considered to be the focus of this meeting, reflected China’s refusal to identify it as the tool to rebalance its economic structure. The Chinese also refrained from making any statement to suggest its support for US Treasury securities, as it would like to see how the US manages its fiscal account and inflation, in our view.
We think the statement is positive for China, but Obama may face pressure back home from critics accusing him of being soft on China. We think Obama may face criticism from the conservative wing in Congress and the general public for sidelining the issue of the RMB exchange rate in the joint statement. In our view, the US may have a higher priority now in cementing China’s support for US Treasury debt, and is in a weak position to push on the exchange rate front. We believe China will appreciate the RMB at its own pace and do not anticipate major move in the near term. The recent statement in the PBoC’s 3Q09 monetary policy report already revealed Beijing’s changed attitude in benchmarking the RMB more against other global cross rates, which may achieve a better balance against the EUR and JPY as the USD weakens. With the memory of the 1985 Plaza Accord and its impact on the Japanese economy in mind, we believe China’s policymakers would opt to boost private consumption and domestic demand as the means for global rebalancing, rather than a sharp rise in the RMB. We also think that this could be a better solution for the rest of the world.

2,000. The United States spends nearly $2,000 a person on defense and accounts for over 40 percent of global military expenditure. Yesterday, the Stockholm International Peace Research Institute released its annual yearbook on arms and international security. Worldwide defense spending reached $1.46 trillion in 2008, up four percent from 2007 and 45 percent since 1999. Even though the US accounted for the bulk of the increase, it’s not alone.

“The Yearbook shows that the USA accounted for the majority (58%) of the global increase between 1999 and 2008, with its military spending growing by $219 billion in constant 2005 prices over the period. Even so, it was far from the only country to pursue such a course. China and Russia, with absolute increases of $42 billion and $24 billion respectively, both nearly tripled their military expenditure over the decade. Other regional powers – particularly India, Saudi Arabia, Iran, Israel, Brazil, South Korea, Algeria and the UK – also made substantial contributions to the total increase.

“‘The idea of the “war on terror” has encouraged many countries to see their problems through a highly militarized lens, using this to justify high military spending,’ comments Dr Sam Perlo-Freeman, Head of the Military Expenditure Project at SIPRI. ‘Meanwhile, the wars in Iraq and Afghanistan have cost $903 billion in additional military spending by the USA alone.’”

Image from the Economist.

The Stockholm International Peace Research Institute released a report today detailing the global arms trade. The United States, Russia, Germany, France and the United Kingdom are the five biggest suppliers of major conventional weapons. The US and Russia account for over half of all exports.

Two rising powers – China and India – are the world’s largest recipients of arms, with Russia supplying the vast bulk to both countries. In the last two years, however, transfers of major weapons systems to China fell dramatically. China is shifting its “focus to domestic procurement” and did not place any “new ‘big ticket’ orders for combat aircraft or naval vessels with Russia in 2007 and 2008.”

Image from the Economist.

President Obama meets Iraqi Prime Minister al-Maliki Source: AFP

President Eisenhower and Nikita Krushchev (and Nixon) Source: PBS

President Obama said back at the end of February that all U.S. troops will be withdrawn from Iraq by the end of 2011, with most out by August 2010.  His policy is to pull out of Iraq and take American power instead to Afghanistan and Pakistan in order to root out Al Qaeda and do some nation-building there.  There will be ramifications of this policy shift.   One risk, highlighted by those on the right and in a weekend New York Times article, is that the successes of the surge, namely the build-up of the Sunni Awakening Councils that took back Sunni strongholds from Al Qaeda, could be reversed. 

The Shiite-dominated Iraqi government has allegedly ramped up arrests of Awakening leaders, while U.S. forces stand by.   President Obama’s policy could leave the Iraqis to slug it out, as perhaps they should.  But, nonetheless, let us be clear on what the ramifications of this policy shift might be:  increased bloodshed and instability in Iraq; Shiite dominance in a sizable power so close to Iran and the Gulf; and, possibly a resurgence of Al Qaeda in the Sunni areas.

General Raymond T. Odierno, America’s top commander in Iraq and a key architect of the surge, weighed in on the issue and with his opinion of President Obama this weekend on John King’s State of the Union:

“He’s our commander-in-chief,” Odierno said.  “As our commander-in-chief, we take direction from him.”  He added:  “He’s very attentive. He listens. He’s incredibly intelligent. He talks through the issues. . . .He makes a decision and then we execute those decisions and that’s all you can expect out of your commander-in-chief. And I’ve been very pleased with the interaction that I’ve been able to have with him.”

In a New York Times column this weekend, Jean Edward Smith argues that President Obama, in handling Iraq, should take a page from President Eisenhower’s decision to end the war in Korea in 1953.  Eisenhower, in spite of the hawks in his own party, decided to negotiate an armistice at the 38^th Parallel with the communist adversary.  With 150,000 U.S. war dead, America and the West would reap no gain, nor the flip side, inflict no punishment on the communist aggressor.

Just like Obama did in Iraq last week, Ike went to Korea and had a look for himself and decided it was a stalemate.  When South Korean President Rhee tried to derail the talks with the north, Ike threatened to pull out of Korea entirely, which would have left Rhee to face the communist onslaught himself.  U.S. troops, though reduced in recent years, remain in Korea to this day.

The parallel that Smith makes between Ike and Obama is not compelling.  What the Obama administration plans for Iraq is more akin to the threat Ike made to Rhee (to pull all U.S. troops out) than it is to the Korea policy followed by successive administrations since 1953.  That is, to maintain a U.S. troop presence to help secure South Korea from aggression.  Smith makes a good point that only Ike, the former Supreme Allied Commander in Europe in World War II, could have pushed through such an armistice in Korea.  Had Truman tried this, he might have been impeached.  While President Obama doesn’t have the military stature that Ike had, his Iraq policy is broadly popular.

Ike and Truman both sought a measured response in Korea.  They both sought to contain the extension of communism without triggering a world war with China and the Soviet Union.  MacArthur and others on the Republican right wanted to take the war to the Chinese. (Ike’s Secretary of State John Foster Dulles even said the Chinese required “one hell of a licking.”)  Kissinger has argued that the best scenario for U.S. interests would have been something in between what Ike and Truman sought and what the right wing aspired to.  He has argued that U.S. forces should have moved, early in the war, not to the border with China at the Yalu River, which MacArthur did, triggering a massive Chinese response, but to one hundred miles south of that, at the “narrow neck” of the Korean peninsula, a defensible position where the country would have been nearly reunified, with 90% of the population and the capital of the north behind allied lines.  This way the U.S. would still have avoided threatening China, but would have secured a non-communist reunification of Korea.  We wouldn’t have this pesky nuclear arms mess with North Korea today.  But there are no sure bets in war and peace: there is no certainty that the Chinese would have tolerated even Kissinger’s scenario.

Perhaps President Obama should endeavor to find Kissinger’s middle ground in decisions on where to apply U.S. military power.  Reap the maximum advantage without threatening the major powers.  Easy to write, much harder to do.  That’s why I blog…

US Secretary of State Hillary Clinton speaking about her upcoming trip to Asia. Credit: Mario Tama, Getty Images

American Secretary of State Hillary Clinton is headed to Japan, Indonesia, South Korea and China this week for a series of talks aimed at strengthening ties across the Pacific Ocean.  Clinton has outlined that her priorities for her trip include:

• A more “rigorous and persistent commitment and engagement” with allies in Asia
• Working with Asian powers to confront the financial crisis
• Preventing nuclear proliferation in Asia (i.e. North Korea)
• Cooperating with China to combat climate change, potentially with a “climate pact” that would seek out common economic goals for both Washington and Beijing

Many experts and media sources have pointed out that Clinton’s first trip in her new job is significant because it seeks out “rising Asia” and the need for the US to engage it.  And, Clinton’s visit to ascendant China will be, naturally, the centerpiece of her diplomatic tour.  Perhaps the Chinese news source Xinhua has said it most clearly, describing China as an “essential partner” for the US.  Howard LaFranchi in the Christian Science Monitor also writes a compelling analysis of the US’ key relationship with “rising Asia”, highlighting Indonesia in particular.

Clinton’s trip will come on the heels of Chinese President Hu Jintao’s return from visits to the Middle East and Africa.

Chinese President Hu Jintao and Senegalese President Abdoulaye Wade. Credit: AP Photo/Rebecca Blackwell

The past few years have seen increased Chinese economic involvement in Africa, particularly in the form of investments and infrastructure projects.  China has come under fire for what some call “ethics-blind aid”, ignoring the policies and politics of nations it engages with for trade, seeking only to capitalize on plentiful natural resources and business opportunities.  2008 alone saw China’s total FDI in Africa at $107 billion.

Hu’s visit to resource-poor nations this time, including Senegal, Tanzania, Mauritius and Mali, attempts to dispel this accusation.  Hu has pledged $90 million to Senegal for infrastructure projects and $74.9 million for a Sino-Malian “Friendship Bridge”, all as part of a campaign to improve China’s image as a responsible global player willing to dole out aid for aid’s sake.  The Africa trip, however, follows Hu’s visit to Saudi Arabia and other Gulf states in the Gulf Cooperation Council (GCC).  In Saudi, Hu pledged to build a $1.8 billion monorail in Mecca for Hajj pilgrims, hardly unrelated to China’s energy security and increasing dependence on Saudi oil.

Secretary of State Clinton and her boss, President Barack Obama, will be keenly aware of China’s continuing influence in the Middle East and Africa.  Clinton’s visit to Beijing this week will be a key indicator of how the US and China will navigate their complex relationship during the months to come.

Check out the FPA’s China blog here: chinatrade.foreignpolicyblogs.com.

Dennis Blair, the new national intelligence director, appeared before the United States Senate Committee on Intelligence on Thursday. Blair delivered the US intelligence community’s annual threat assessment to Congress.

In Blair’s written testimony he highlighted the rise of Asia.

“All together—Japan, the ‘tiger’ economies like South Korea and Taiwan as well as the rising giants of China and India point to the ‘rise of Asia’ as a defining characteristic of the 21^st century. China’s reemergence as a major power with global impact is especially affecting the regional balance of power.”

Photo from Susan Walsh/Associated Press.