Team Obama just can’t seem to make a play in China. After 8 years of Bush/Chenney, Obama was supposed to be a stiff fresh breeze that blew out the cobwebs of war and nationalistic unilateralism. The Americans, however, can’t execute on the basics when facing China. This April Fool’s week announcement that the US was dropping currency as a negotiating variable for a definite maybe on nuclear Iran isn’t a cause for optimism. The Chinese have pushed the Americans around a lot in the first period, and they don’t see much reason to stop now. Obama has stayed on his feet but hasn’t managed to make anything happen. He’s tentative and slow out there — defensive and reactive. If the Americans are going to turn things around in the second half, they’re going to need to start calling better plays and executing the basics a lot more consistently then they’ve been doing so far.
The Deal: The Obama Administration – with Tim Geithner’s Treasury taking the lead – has decided to delay the semiannual exchange rate report to Congress, originally slated for April 15, that would have possibly labelled China a systematic currency manipulator. http://www.nytimes.com/2010/04/04/business/04yuan.html
Future venues for the exchange-rate debates will now be moved to the G20 meeting in April, the annual Strategic and Economic Dialogue between US and China in May, and another G20 in June. It also seems that China will consider moving towards the rest of the major powers, including Russia, in attempting to persuade Iran to moderate its nuclear ambitions.
The Results: China won this one with a head fake and a promise that will never be made public. This decision is 100% Geithner — Treasury is still running China policy in Washington and this administration favors the kind of back-room, big-picture, elites-only dealmaking that the Chinese Communist Party understands and trains for. By moving the debate about renminbi-dollar exchange rates to the back rooms and allowing the Chinese to hijack the US decision-making process, the PRC has not only won this battle — they seem to have solidified their ability to influence US policy at will.
The Timing: The Treasury Department report on currency manipulation, scheduled for release on April 15, was the kind of solid, public deadline that Chinese deal-makers loathe. Chinese would much prefer to do their horse-trading quietly and to disclose only glimpses of the final decision. For the Chinese to wait until just days before the deadline to apply pressure to change the time, date, transparency, substance and scope of the deal was typical — and in this case, beautifully executed. Instead of a single authorative report accusing the Chinese of manipulation, we are now looking at a never-ending series of international consensus-building and jaw-boning.
Note to internatational deal-makers — when Chinese counter-parties don’t like the substance of a negotiation, they will attempt to delay it, make the discussion less binding, and move the debate to a more favorable venue.
The Scope: The US went into the currency negotiation with facts, figures and broad support for a measure that would be bad for China. Instead of taking on the forex issue head-on and publicly — a tactic that Americans favor but Chinese find distasteful – China deflected by tying other issues to the forex flap and significantly enlarged the scope of the deal. Chinese dealmakers are expert at cobbling together grand projects that make any particular disagreement seem puny when compared to the bigger picture. Forex is a sore subject for the Chinese — even their allies think that the currency is being manipulated. Iran’s attempt to get nuclear capabilities, while seemingly unrelated, gave China the leverage it needed to neutralize America’s most powerful weapon. Not only will the forex rates stay unchanged, but China is now recognized as the power-broker in the Middle East.
Note to international deal-makers — be careful about being ‘scope-a-doped’ by Chinese counter-parties who find solutions by upping the ante. Keep sight of your original goals.
The Linkage: China linked two issues — the currency issue to which it is a central actor, and the nuclear Iran issue to which it is an ancillary participant. The currency revaluation would cost China a lot — the actual forex change would be messy & expensive, but the loss of face from being forced to make such a huge decision AND being insulted as a cheater would have stung even more. It would be a terrible fight where even victory would be costly. China’s response was to find a way to link the forex issue to something that the US cared about but was no-lose for the Chinese side — and that’s how the Iran issue found its way into the forex debate.
Note to negotiators: many westerners in China will agree to linkages of seemingly unrelated issues early in the discussion to ‘maintain face and harmony’, only to have it bite them in the back later.
The Outlook: China has scored a couple of short term wins here, but set the stage for their economic juggernaut to continue making winning plays for the rest of the season. They have stuck to their traditional playbook — creating linkages between unrelated issues, masterfully managing time and deadlines, and moving the real debate to forums that they consider most favorable. The Chinese have also burnished their international status as the ‘honest broker’ among major powers with their new role as the voice of reason in Iran. The US didn’t come out of this empty-handed — they have solidified a stronger anti-manipulation coalition within the US, though it remains to be seen how it will play in an international G20 environment where anything can happen — but usually doesn’t. The US can also get credit for inching China closer to the rest of the world on the nuclear Iran issue, though many are asking if that will be of much value moving forward.
So how does this end? The Chinese win in the short term — they continue manipulting forex rates until later, and they get arm-twisted into doing what was always in their best interest with Iran. In the longer term the Chinese will probably find it necessary to let the RMB appreciate — just to manage their own import issues — and the US side will have to start over by offering new enticements when the Chinese give the OK. The Chinese will continue wringing concessions out of this administration at will, simply because it can.
Got to say, though. Hu JinTao as the Good Cop while Grandpa Wen was the Tough Guy? Well played, my friends. Well played.
Opinions? Comments? Please feel free to go to the ChinaSolved linkedin group or leave a comment below.