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 successor.

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 accept.

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.


China George W. Bush U.S. Hillary Clinton