As the newest leader of the free world, President
Barack Obama may be tasked with solving a domestic economic crisis,
tackling global terrorism, and calming tensions in the Middle East. But
one of the most critical issues demanding the new president's attention
is the U.S. relationship with China, according to Stephen M. Ross
School of Business Professor Kenneth Lieberthal. The solid foundation
set between the nations in recent years will be tested by such pressing
issues as the global recession and climate change.

Lieberthal presented U.S.-China Relations in the Obama
Administration: Continuities and Changes during the 42nd William K.
McInally Memorial Lecture Jan. 27 at the Ross School's Blau Auditorium.
The Chinese government, he said, may be one of the very few in world
sad to see George W. Bush leave office and is nervous about his

Lieberthal is the William Davidson Professor of Business Administration
at Ross, the Arthur F. Thurnau Professor of Political Science at the
University, and a distinguished fellow and director for China of the
William Davidson Institute. He also is a faculty associate at the
Center for Chinese Studies. He is currently on leave as a visiting
fellow in foreign policy studies at the Brookings Institution in
Washington, D.C. During the Clinton administration, Lieberthal served
as special assistant to the president for national security affairs and
was the National Security Council's senior director for Asia. He also
was a consultant for the Department of State during the Carter and
Reagan administrations.

The U.S. has the world's most extensive bilateral trade
relationship with China, and China holds the largest amount of
U.S.-dollar-denominated debt instruments. As a result, the two
countries are joined at the hip at this point, said Lieberthal. The
U.S. and China have forged solid ties over the years and Obama is very
much in the mainstream in his approach to China. Neither side is
seeking fundamental change in the way we deal with each other,
Lieberthal noted.

That's the good news. But issues do exist that could create a
rocky road moving forward. First, the Chinese government is unfamiliar
with Obama and his team, so there's some natural wariness on the
Chinese side. Also, neither Obama nor Secretary of State Hillary
Clinton can claim much experience dealing with the nation.

Plus, the Bush years were good for the Chinese, said Lieberthal. They
enjoyed almost the best possible circumstances under the past
administration. The former president kept the U.S. market for Chinese
goods open and fended off protectionist legislation from some in
Congress. Bush's foreign policy also eroded the United States' soft
power and respect around the world, which was good for China because
it's a power on the rise.

But a more insidious and underlying issue has defined U.S.-China
relations for the past three decades, which could impact Obama's
policies moving forward. Neither side trusts the other side's
long-term intentions, Lieberthal said. As a result, both countries
hedge their bets in case the relationship sours, and that is done via
military buildup.

Two major issues that President Obama faces early in his tenure
-- the global economic crisis and climate change -- could set the stage
for changes in the U.S.-China dynamic.

On the economic front, China has a major stake in a U.S.
recovery, since U.S. consumers purchase so many Chinese exports.
Meanwhile, a newly sluggish Chinese economy would benefit from a boost
in exports. At the same time, the U.S. economic stimulus plan will
depend on ongoing, large-scale Chinese purchases of U.S. debt.

This is where complications can arise, as high unemployment in the U.S.
typically leads to increased calls for protectionism. High debt levels
also could tempt policymakers to print more money, which would degrade
the U.S. dollar and devalue the U.S. debt owned by the Chinese.

Another issue to consider is what happens if a Chinese company
buys manufacturing operations in the U.S. Lieberthal worries that
Chinese companies don't possess the public relations and political
savvy to counter possible protectionist arguments painting them as
vulture investors. If Chinese companies do invest here, they should
seek that expertise to clearly communicate their business plans and
remind Americans how many jobs they're creating or saving.

In fact, the two countries must communicate very clearly -- and often -- as both develop their economic plans, Lieberthal said.

We have to be very forthcoming with the key Chinese players and
we have to do it weekly, he noted. There is a lot that can seriously
go wrong and we are tightly interconnected.

On a global scale, this is the first time during a worldwide
economic crisis that China will be invited to help shape a new global
financial agenda. Unfortunately, said Lieberthal, there's not a wealth
of sophisticated financial knowledge in China. And with so much
uncertainty in the global markets, the Chinese government may not have
clarified its substantive positions yet.

In terms of climate change, Obama's view on environmental
stewardship is the polar opposite of Bush's, Lieberthal said. And while
climate change hasn't been at the forefront of the U.S.-China agenda,
it will move there very fast. It's likely that a central piece of
Obama's environmental policy will be a cap-and-trade system, in which
carbon emissions are capped but could be traded on an open market.

That kind of legislation isn't going to pass in Congress unless
China agrees to some sort of carbon emissions policy of its own,
Lieberthal pointed out. Opponents will argue that if the U.S. caps
emissions and China does not, it will put U.S. business at too much of
a disadvantage. Lieberthal said he doesn't think that argument is a
good one on substance, but it does carry a lot of power politically.

China argues that it is still a developing country, and
historically the U.S. emitted huge levels of carbon during its
development. Arguments aside, the two countries do have one thing in
common: Neither has a national energy policy. Now, both countries have
to do that -- and do it in a way that's reasonably cooperative,
Lieberthal said.

The climate change issue represents an ideal opportunity for
Obama to develop a good working relationship with China. If both
countries perceive the other side as seriously working toward a
solution, they may be encouraged to move toward a policy both can

The U.S. and China have bilateral relations, but they haven't
been serious partners on truly global issues, Lieberthal said. A
cooperative agreement on emissions could change that for the better.
Conversely, failure on the issue will have negative consequences.

I think if this gets going, it will be a major bridge to the future. But I have to say the opposite is also true, he said.

Overall, the next few years will be pivotal in shaping the
future of U.S-China relations. While there's reason for optimism, the
task isn't going to be easy.

Building trust across the U.S.-China relationship will be important, but also potentially difficult, Lieberthal said.