Fernando Fuster-Fabra's Blog

WORLD TRADE & ECONOMY JIGSAW PUZZLE: THE EXPLOSIVE G-2 FORMULA | February 28, 2010

President Obama’s visit to China last November hastily coined a new economic axis, G-2, in U.S. and international economic circles. The results of the Copenhagen Climate Change Conference (https://fernandofusterfabra.wordpress.com/2009/12/20/obama-after-copenhagen/) a few weeks later seemed to confirm closer ties between two world powers with different goals. I for one was totally convinced that the Chinese theatre show would be short lived.

World trade events involving the U.S.A. & China in the last quarter have tensed relations. However, bilateral commercial relations have not been the only point of confrontation that has lit the red-light alert in the growing risk of rupture. U.S. arms sale to Taiwan and the Dalai Lama’s private visit to the White House have served to ignite the already heated atmosphere.

There are two main points that oblige the Obama Administration to watch their step in their relations with China :-

  1. The Iran nuclear dilemma
  2. China’s hold on U.S. public bonds

Let me analyse each item and the impressions said issues cause in other scenarios such as the European Union.

The Iran Nuclear Dilemma

The international scenario on nuclear development is supposedly supervised by the United Nations through its IAEA; such situation implies that the five U.N. members (China, France, Russia, United Kingdom & U.S.A.) with veto power in the Security Council have final say on sanctions and nuclear power control. Having convinced Russia to back U.S. demands on Iran, China is the only veto bloc power that could frustrate U.N. Security Council resolutions against Iran’s uncontrolled uranium enrichment scheme.

Being aware of its strategic vote, China has the Obama Administration in a rather awkward position. No words are required whilst China picks the flower dilly dallying on the issue.

China’s hold on U.S. public bonds

China may have as much as 20% of U.S. long-term bonds. A recent move to sell part of its holdings just as commercial hassle on Chinese products imported into the U.S.A., was but a warning of what China could do to effectively harm the still shaky U.S. economy. Furthermore, China has refused to revalue its Yuan, in order to rebalance U.S.-China import-export trade flow.

In this rather inflamed setting, American economic policies seem predestined to toe a soft-line where China is concerned. Nevertheless, President Obama’s bet on a G-2 axis to trigger a global world economic recovery is destined to fail. Moreover, if the U.S. Administration has still any hopes of soothing their Chinese counterparts with light concessions, it then becomes evident that the Obama team knows very little about Chinese Machiavelli-style use of time to wear off their adversaries.

Instead of a G-2 with this unreliable undemocratic commercial partner, the Obama Administration has to bend back to envision a more solid panorama where the other partner lies across the Atlantic Ocean, a natural partner for free-trade, economic sustainable growth, democracy and peace.

Fernando Fuster-Fabra, Madrid


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