Question: How do you apply leverage against an emerging geopolitical giant that also happens to be among your biggest creditors? Answer: not very well.
When President Bush took office, prodded by neoconservative advisers, he viewed China as a potential rival and menace. Today, bogged down in Iraq and hobbled by American financial dependence on Beijing, Bush must look to the Chinese like a modern, self-inflicted Gulliver.
Washington has several issues, as the children say, with the Chinese. For starters, Beijing should play by the usual financial rules and not keep their currency artificially cheap to stimulate exports, which worsens our $200 billion bilateral trade imbalance.
We want the Chinese to respect American intellectual property, religious liberty, and human rights. We'd like Beijing to play a more helpful role in the nuclear containment of North Korea and Iran, and, please, not to menace Taiwan.
Administration officials have wishfully urged the Chinese not to try to corner global petroleum supplies, as their appetite for energy grows. In other words, do as we say, not as we did.
But, in polite White House conversations with Bush last week, China's leader, Hu Jintao, was having none of it. Hu offered empty promises of greater currency ''flexibility," and increased domestic demand, but explicitly ruled out the dramatic revaluation that the Bush administration wants, as well as explicit commitments in other areas.
And there is just about nothing Bush can do about it. The world's sole remaining superpower, despite a military budget more than 10 times China's, is curiously impotent when it comes to influencing Chinese behavior.
Why? Two big reasons. First, we have let ourselves get into a dangerous economic co-dependency. We keep borrowing money to finance a trade deficit that gets more alarming every year. The Chinese, now our second-largest creditor, keep accumulating dollars, which they lend back to us to underwrite those deficits and provide America the borrowed funds we need so that we keep buying their products.
Some of those products are made by affiliates of US companies, which have flocked to China for the dirt-cheap labor. Others are made by mostly Chinese companies, which have paid huge subsidies or imposed content requirements to induce American producers to shift high-end, as well as low-end, production to China.
What would happen if the Chinese pulled back, even a bit, on their lending? Heavily dependent money markets would go into cardiac arrest.
The second reason for our lack of diplomatic leverage is that Washington has let the narrow interests of American corporations overwhelm the broad interest of the nation. The United States sponsored Chinese membership in the World Trade Organization long before China was willing to play by normal trade and currency rules.
Why did we do this? Because American companies hoping to locate production in China or to export to China, as well as American banks and insurance companies, were eager to have China in the trading system, even if China broke trade and currency rules.
China breaks the rules by pegging its currency, by lending to government-controlled companies at zero interest, by limiting what foreigners can buy, and much more. It is an export powerhouse, but not a normal capitalist country. By letting a still mercantilist China into the WTO prematurely, Washington lost its best leverage to change China's behavior going forward.
Normally, a developed country would be exporting capital to a developing one. With a need to create jobs for hundreds of millions of peasants and a growth rate of about 10 percent a year, China has a huge appetite for capital. China absorbs massive investments by foreign companies with one hand, while it doles out dollars to American capital markets with the other. As Hu adroitly demonstrated with Bush, by making itself indispensable China makes itself untouchable.
The Bush administration imagines that as China becomes more capitalist, it will naturally become more democratic. Dream on. China remains a one-party state that still plays rough with dissidents. In case we forgot, Nazi Germany was a convenient alliance between a despotic state and the captains of German private industry. China displays a mutation of capitalism that violates both free markets and free society, and does very nicely at it.
At last week's meetings, fittingly, most of the honored guests were American corporate executives. If our China policy were not so warped by the dictates of America's business elite, Bush might have more diplomatic leverage to pursue his political objectives with Beijing. This irony might seem poetic justice if the stakes weren't so high.
Robert Kuttner is co-editor of The American Prospect. This column originally appeared in The Boston Globe.
