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Meeting of giants

Mahmood Hasan
THE United States and China, two major economic engines of the world, met for the first ■ round of the Strategic and Economic •' Dialogue (S&ED). under the Obama " administration, in Washington on July ‘ 27-28. China is the largest developing nation, with a GDP of $4.2 trillion (2008) and US is the largest developed country, with a GDP of S14.2 trillion (2008)--the two have been nicknamed "G2."
President Hu Jintao and President George Bush had initiated the S&ED in 2006 to discuss long-term strategic issues in bilateral economic relations, twice a year, alternatively in .^Washington and Beijing. During the Bush administration four dialogues , were held between 2006 and 2008. The decision to continue the S&ED was laken by President Obama and President Hu Jintao in April at the G20 Summit in London.
Chinese Vice-Premier Wang Qishan and State Councilor Dai Bingguo led the 150-member strong cabinet-level delegation to Washington. President
Barrack Obama addressed the inaugural session on July 27 at the Ronald Reagan Center and wanted the agenda to expand to include foreign policy issues. Thus, US Secretary of State Hilary Clinton came into the scene and co-chaired the "Strategic Track" with Dai Bingguo. US Treasury Secretary Timothy Geithner co-chaired with Wang Qishan the session on "Eco-nomicTrack."
The dialogue comes at a time when the world economy is in doldrums, but the situation in the two countries is quite different. The financial meltdown late last year, has compelled the Obama administration to cough up two rescue packages -- $787 billion for economic stimulus, and another $700 billion to bail out its financial system.
This, in turn, has put tremendous pressures on its current budget. To finance these packages and pay for the two ongoing wars in Iraq and Afghanistan, the US Treasury has been selling its debts abroad, which will eventually push the 2009 budget deficit to a soaring $1.84 trillion. Its trade deficit now stands at S820 billion, i.e.
4.7% of its GDP, which is rather untena-
ble. Because of the recession, the US economy is projected to have a negative growth of 2.6% this year.
On the other hand, though China is also adversely affected by the economic recession, its economy is expanding. Its GDP growth rate is expected to be 7.2% in 2009. And it enjoys a huge trade surplus of $ 360.7 billion (2008).
The most interesting aspect of US-China relationship is that, despite wide political differences, China has invested vast amounts in US Treasury bonds. The US Department of Treasury is selling its bonds to oil-revenue-rich countries of the Gulf and to China, which has an enormous current account surplus. China currently is the single largest creditor of the US and
holds US Treasury bonds worth $801.5 billion.
China has intelligently turned its trade-surplus into a formidable clout to soften US criticisms on human rights and democracy, and emerged as a credible interlocutor on global issues. China however, has also shrewdly retained its prerogative to be critical of US. Thus, the Sino-American financial relationship has |iad a profound impact on these two erstwhile "adversaries" -- it has turned them into cooperating "partners."
Having invested its trade surplus in US, the Chinese government is now deeply worried about the stability and value of the US currency. They are concerned about the safety of their investments. The fear stems from the
possibility that if foreign holders of US debts starts selling the bonds -- it would send the dollar crashing and trigger a runaway inflation, which in turn will reduce the value of the assets. No wonder China and several other countries have been openly talking about alternative currencies to the US dollar as the world reserve currency.
The press briefing by the US Treasury Department was upbeat. Actually, nothing much has been achieved. US has not succeeded in getting Chinese commitment to reign in the North Koreans or any agreement on global warming. US and China are the largest producers of greenhouse gases, and neither has signed the Kyoto Protocol. Without US and China on the same table, a solution at the Copenhagen Conference UN Framework Convention on Climate Change (UNFCCC), coming up next December, will certainly be elusive.
There has also been no agreement on the sore issue of trade imbalance between the two countries. The Chinese delegation has not agreed to change the exchange rate between the dollar and the "renminbi" (Rmb). The US feels that the over-valued Chinese currency inhibits US exports to China. Americans argue that with a change in the value of "Rmb" and with rising levels of income, Chinese consumers could consume more from the US and help spur the US economy by creating more jobs and also, in turn, remove the
trade imbalance. The US now has the highest unemployment rate at 9.5% of the work force.
President Obama's inaugural speech emphasised the need to strive to cooperate not only on economic matters but also on key issues such as climate change, nuclear proliferation and transnational threats, and hoped that the relationship "will shape the 21st Century." On China's human rights record and the recent violence in Xinjiang province Obama's reference was indeed muted. Clearly the tone of the address was mellowed.
The strategic and economic dialogue between United States and China is a welcome development for the global economy in general and the smaller nations in particular. The US is likely to persuade the Chinese to bring about more reforms with active and friendly engagement rather than with pressure or confrontation. The engagement will also lead to reduction in tensions in the Asian region, to the benefit of smaller nations like Bangladesh.
President Barrack Obama is scheduled to visit Beijing later this year. One hopes that the summit between President Barrack Obama and President Hu Jintao will produce agreements on issues of common concern -- particularly global warming. It will, however, be disastrous if the two giants start to move in opposite directions again.
Mahmood Hasan ts a former Ambassador and Secretary.