One of Bill Clinton’s major policy accomplishments was his willingness to aggressively work toward improving trade relations with the Chinese…a policy that became known as “Constructive Engagement” (CE).
Bush ’43 picked up the CE trade ball and continued to run with it as relations with the Chinese continued to thrive and Constructive Engagement reached new peak levels of co-operation between the two “G2” economic titans. President Bush optimised the relationship with the establishment of the Strategic Economic Dialogue (SED).
The policy of CE ushered in some exciting times and despite a few diplomatic speed bumps there existed a sort of economic Sino/American détente and peaceful coexistence.
The ever pragmatic China strengthened its position as the work shop of the world and the flush, live for the moment US consumer continued to buy their stuff as the Chinese willingly provided vendor financing. China and the US became the dominant Odd couple of global trade as China accumulated extreme surplus’s offset by the US’s huge deficits. They saved…we spent. China even went as far as offering an olive branch to a then protectionist Congress by revaluing the Yuan in 2005. This imbalanced equation worked…for a time… until it all came crashing down in the wake of the financial crisis.
My, how times have changed. The great global recession has taken its toll on CE. I would offer that Constructive Engagement has now become Destructive Disengagement between the two economic powerhouses as G2 trade policy relations have atrophied. In many ways the progress and good will of the Clinton/Bush years have evaporated…heightened by clashes over everything from the value of the Yuan, to trade and human rights and internet freedom.
This is not a good thing. Unlike his predecessors, over a year in, President Obama is still searching for his policy footing when it comes to the dealing with the growing economic strength of the Middle Kingdom. Meanwhile his economic advisors are either MIA or still confusingly acting like the gang that couldn’t shoot straight as evidenced by Treasury Secretary Geithner’s reversal on originally labelling China “currency manipulators” and then reversing polarity by delaying the decision on it. Now Commerce Secretary Locke is currently on his first official China visit and started his trip with the headline comment in the China press that “he is very concerned about China policy”. Great beginning…way to set the tone Secretary Locke!! He’ll not go far with his Chinese counterparts continuing with the Administration’s short sighted hard line protectionist strategy.
The Chinese do not respond well when confronted with Master of the Universe rhetoric…especially when they don’t consider you Masters of the Universe anymore. Presidents Clinton and Bush, to their credit, understood how to finesse the Chinese relationship by having policies and a team that understood the importance of the G2 economic partnership. Unfortunately the current resident of the White House and his second team advisors, after badly fumbling it, have not yet picked up the Constructive Engagement ball.
I am not optimistic that next weeks SED meetings between the Chinese and Secretary of State Clinton and Secretary Geithner will provide any further progress on correcting the trade imbalances that remain. A successful trade negotiation requires willingness on both sides to reciprocate…a quid pro quo…a common trust. I don’t believe that the Chinese feel that the current US administration is willing to reciprocate…there is a lack of trust. For example Secretary Locke can whine that there needs to be a level playing field when it comes to green energy but Peking will only point to the US Senate pushing legislation that denied stimulus funds to green energy projects buying foreign made equipment. And so it goes.
With all macro eyes focused on the Euro zone….no one is paying much attention to the substantial erosion of our successful Constructive Engagement policies of the past with the Chinese. Few in the media are discussing the failure of the Administration to take the opportunity of the global economic crisis to deal with the G2 export/import/savings/surplus/deficit imbalances that remain and contributed mightily to the global economic calamity. As deflationary forces continue to wrack the world economy, hopefully policy makers will see the CE light and that will begin to change next week.
This is a guest post from the Peter Stock of Stock Investment Management Inc in Manchester, VT.