A tough decision: Poke the dragon?

WASHINGTON — On April 15, U.S. President Barack Obama must report to Congress on whether China, as evidence suggests, is manipulating its currency to gain a comparative advantage in trade, thus costing Americans jobs in these tough economic times.

With U.S. unemployment creeping toward double digits, the popular political path seems obvious. But China is an essential partner in many of Obama’s top foreign policy initiatives — such as limiting global warming, nuclear proliferation in Iran and North Korea, and Islamic terrorism. And as a major creditor, with deep financial reserves, China is a crucial part of the U.S. strategy to use an April 2 summit of 20 leading nations in London to jolt the world toward economic recovery.

As a result, Obama’s pending decision on whether to inaugurate his relationship with Chinese leaders with a blunt confrontation over jobs and trade is a telling example of how the global downturn can disrupt his foreign policy agenda.

“The arrival on the scene of the global recession brings with it … what could be fatally complicating factors” for some of Obama’s most important priorities, said Brookings Institution President Strobe Talbott. Global institutions will be torn by protectionism and other nationalistic impulses, he said, and nations will be so drained of “political will and resources” that there “simply won’t be enough left over” to deal with major crises.

“Our understandable preoccupation with the international economy,” Talbott said, may create “the temptation of triage,” possibly causing the postponement of time-sensitive issues like nuclear proliferation or climate change until it’s too late.

If U.S. policymakers spent much of the fall of 2008 trying to grapple with the repercussions of a domestic recession, they’ve spent much of 2009 coping with the stunning news that — for the first time since World War II — the world economy will not grow this year. Dennis Blair, the U.S. director of national intelligence, has warned that the danger posed by the resulting chaos is now America’s foremost national security threat.

“There was hope that the current downturn might be mainly an American experience, and so world demand could remain high and perhaps help pull us through,” Christina Romer, who leads the White House Council of Economic Advisers, said recently. “We have realized that hope was a false one. As statistics poured in, we have learned that Europe, Asia, and many other areas are facing declines as large, if not larger, than our own.”

Analysts remember that the greatest damage caused by the Great Depression was not economic, but “political … it was World War II,” noted Stephen J. Stedman, a senior fellow at the Center for International Security and Cooperation at Stanford University. As Western and Asian titans tend to their own domestic political concerns, throwing up trade barriers or frustrating attempts to break the recessionary cycle, extremist forces in poorer nations may find new believers.

“In emerging and developing nations, desperation among unemployed youths can turn into acts of terrorism … spawn uprisings and be the cause of coup d’etats,” said Democratic Rep. Diane Watson of California, a former U.S. ambassador, at a recent House Foreign Relations Committee hearing.

Foreign policy analysts worry that the recession could sap western enthusiasm for expensive forays in Afghanistan; for needed aid to Pakistan, the Palestinian territories, Africa and other danger spots; for plans to limit global warming; and for liberal trade agreements.

“China — are they going to take advantage of this situation worldwide to expand their political influence?” asked Republican Rep. Ted Poe of Texas, reciting a litany of challenges. “Russia — are they going to use their global influence during this crisis to move into former Soviet states? Iran — is the energy crisis affecting the stability of the Iranian government? Mexico — the economic crisis there and the drug war … has led some to warn that ungoverned areas of that country may become sanctuaries for terrorists.”

Republicans are already describing Obama’s proposal for a cap-and-trade system to limit carbon emissions as a tax on industry that will cost jobs. Democrats are pressing for “Buy American” provisions to protect U.S. manufacturers. And members of both parties voice alarm at the administration’s suggestion that it may take hundreds of billions of dollars — on top of the trillion-plus already appropriated — to stimulate the U.S. and world economy.

The April 15 call on China may offer a glimpse of just how pressed the White House is by domestic political considerations.

The Chinese contend that because wages are so much lower in China, a revaluation of the currency would have just a minor impact. But a bipartisan coalition of U.S. lawmakers is loudly insisting that China is practicing protectionism.

Obama raised such get-tough trade issues during the presidential campaign. And in his confirmation hearings in January, U.S. Treasury Secretary Timothy Geithner agreed with those who charged that China was manipulating its currency. But Geithner has since pulled back from a confrontation, and joined with the G7 finance ministers in Rome last month in issuing a conciliatory statement.

“These institutions — the World Trade Organization, NAFTA, our relationship with China — have never been tested in this sort of environment,” said Edward Alden, a senior fellow at the Council on Foreign Relations.

“It’s a fact that China manipulates its currency,” Alden said. “But if we make that designation it immediately puts us into a confrontational position … and I think that will start the relationship between this administration and China off on a very poor footing.” 

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