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8.2009.Improving US China Relations Policy Memo.Indd Belfer Center for Science and International Aff airs John F. Kennedy School of Government • Harvard University August 2009 US-China Relations Project Policy Memo Improving US-China Relations: Th e Next Steps POLICY RECOMMENDATIONS • Allow China’s currency to float freely—floating upwards on the exchanges • Transfer Chinese-owned debt to equity in the US market • Stop the Chinese practice of sterilizing incoming foreign exchange—allowing prices to rise and incomes in Chinese consumer hands to be spent. • Reach agreement on the size, geographical distribution, and purpose of Chinese and US armed forces. By Richard Rosecrance, director of the US-China abroad can now be consumed by an increasingly middle Relations Project at the Belfer Center, Harvard class nation at home. Th ese steps will bring China and Kennedy School the United States closer economically and increase international stability. However, unless the military- oth China and the United States are now security relations of the two countries improve, this emerging from the slumps of the 2008-09 “Great will not be a suffi cient remedy for the two nations’ long BRecession.” But neither country has done much term problems. to address the imbalances that helped to precipitate the crisis. China has already succeeded with the stimulus In 2009 a group of faculty members at the Belfer of its own economy. Th e United States is continuing Center at Harvard Kennedy School joined with the to provide stimulus and also very low interest rates. Chinese Academy of Social Sciences to produce “Power China’s success, however, means greater infl ation, and Restraint: A Shared Vision for the US-Chinese which will have to be checked by higher interest rates. Relationship” (NY: Public Aff airs, 2009). Th is volume If interest rates go up (and capital remains mobile), began with the premise that Great Powers too oft en the Renminbi must rise as well. Th is suggests that the fi ght, especially when the power trend of one state rises recent link between the Renminbi and the US dollar to approximate that of an established leader. Britain must be attenuated or broken. A higher Renminbi will and Germany faced this diffi culty at the end of the have two advantages: for the United States, it will help 19th century, and they failed to solve it. On the other to equilibrate the past trade imbalance; for China, it will hand, America’s rise vis a vis Great Britain was an even stimulate consumption (and enhance imports). It will more challenging event and might have led to confl ict. therefore help China switch from a purely exporting It did not. Th is was because Britain made every eff ort strategy to one that maintains domestic growth through to admit the United States to the great power system internal consumption. Th e goods that were to be sent and to satisfy its requirements in that new role. Britain, US-China Relations Project Policy Memo August 2009 however, did not make similar adjustments to the rise Th is would put further pressure on the US dollar and of German power, and that failure (and the mutual thus depreciate China’s current holdings. failure of Germany to acknowledge Britain’s concerns) led directly to the First World War. Th e United States Perhaps China would like the United States to increase and China obviously do not want to repeat the errors of interest rates, but it cannot do that now, with the Britain and Germany: what can they do about it? American economy just coming out of crisis. Another alternative would be for China to consider switching One relevant historical example is relations between some of its debt instruments (US government bonds) Britain and Germany under Otto von Bismarck, for equities in the private US economy. Sovereign the German chancellor in the late 1800s. Under his wealth funds are already doing this and further leadership, Britain and Germany aimed to diff erentiate purchase of US equities or investment in US companies their foreign policy functions. Britain was the primary could return value to China while limiting holdings of sea power; Germany a predominant land power. US debt. Here China would have to be sensitive to US Bismarck did not seek a great navy, and Britain did not investors and political leaders in limiting its percentage amass a continental-style army. When Bismarck was acquisition of American fi rms. Th ese changes would succeeded by Emperor Wilhelm II, however, Germany not undercut the value of the US dollar. Also, if China changed its policies and resolved to challenge Britain ended “sterilization” of incoming foreign exchange it at sea as well as perhaps on land. Th e diff erentiation could both stimulate its own domestic consumption of function was obliterated, and the naval arms race and also make more likely an equilibrium in the trade contributed to the adverse climate of relationships that balance with the United States. In the longer term, the led Britain to oppose Germany in the war. Renminbi will have to fl uctuate freely, or it will not be held as a reserve currency by other countries. In the Today, China and the United States are both spending medium term China cannot switch dollar holdings substantial amounts on armaments. Th ere is no for SDRs. Th is will only create another dollar hoard in apparent diff erentiation of function: China is aiming the coff ers of the IMF which its management will not at an increases across the board: in air, space, as accept. well as land and naval forces. If these come close to approximating those of the United States, there is likely Most important, however, is an agreement on the size to be confl ict between the two powers. Th e United and use of Chinese and American military forces. Th e States needs to understand the limits China places on United States has already accommodated to British, these forces to relax on its own military preparations. French, and Russian intercontinental forces. If China Th ese understandings have not yet been reached. aims to construct six SLBMs, that presents no problem. In economics, the two powers are also proceeding If it constructs three or four carrier battlegroups, there on diverse tracks. Th e United States has become is no problem. But if it were to aim at 20 SLBMs or 12 more indebted as a result of importing too much and carrier battlegroups, it would start an arms race with the exporting too little, with China as the main benefi ciary United States that would have unknown consequences. of the US defi cit. China has placed the funds it has Th ese must be avoided. earned in the US money market and US government securities. Meanwhile the dollar has fallen, and this has Statements and views expressed in this memo are solely meant that Chinese investments have deteriorated in those of the author and do not imply endorsement value, so much so that China has spoken recently of the by Harvard University, the John F. Kennedy School need to diversify its holdings, perhaps shift ing part of of Government or the Belfer Center for Science and its funds to SDRs or to a basket of foreign currencies. International Aff airs. For more research on US-CHINA RELATIONS, please visit: http://belfercenter.org/region/136 US-China Relations Project Policy Memo August 2009 ABOUT THE BELFER CENTER ABOUT THE AUTHOR Th e Belfer Center is the hub of the Richard Rosecrance is an Harvard Kennedy School’s research, adjunct professor at Harvard’s teaching, and training in interna- John F. Kennedy School of tional security aff airs, environmental Government, a research and resource issues, and science and professor of political science at technology policy. the University of California, Los Angeles, and a senior fellow of the Th e Center has a dual mission: (1) International Security Program to provide leadership in advancing at the Belfer Center for Science policy-relevant knowledge about the and International Aff airs. He most important challenges of inter- was formerly a professor at the national security and other critical University of California, Berkeley, issues where science, technology, and the Walter S. Carpenter, Jr., professor of international and environmental policy, and interna- comparative politics at Cornell University. He served in the tional aff airs intersect; and (2) to pre- Policy Planning Council of the Department of State. He has pare future generations of leaders for written or edited more than a dozen books and many scholarly these arenas. Center researchers not articles. He is the principal investigator of UCLA’s Carnegie only conduct scholarly research, but Project on “Globalization and Self Determination”. He has also develop prescriptions for policy received Guggenheim, Rockefeller, Ford, Fulbright, NATO, and reform. Faculty and fellows analyze many other fellowships. He was president of the International global challenges from nuclear pro- Studies Association and served as director of UCLA’s Center for liferation and terrorism to climate International Relations from 1992 to 2000. change and energy policy. RELATED RESOURCES Zhang, Hui. “Ending North Korea’s Nuclear Ambitions: Th e Belfer Center for Science and Need for Stronger Chinese Action.” Arms Control Today, July/ International Aff airs August 2009. John F. Kennedy School of http://belfercenter.org/publication/19187 Government Kaufmann, Eric. “Th e Return of Economic Nationalism.” Th e Harvard University Providence Journal, June 20, 2009. 79 JFK St. http://belfercenter.org/publication/19139 Cambridge, MA 02138 Allison, Graham and Meghan O’Sullivan. “Case Study: Th e Rise http://www.belfercenter.org of China and the Global Economic Crisis.” Memorandum, Har- vard University, Belfer Center for Science and International Af- fairs, May 6, 2009.
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