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Shen Dingli is Executive Dean of the Institute of International Studies and Deputy Director of the Center for American Studies at Fudan University.

by Dingli Shen

Chinese President Hu Jintao’s upcoming visit to the United States, postponed following hurricane Katrina, will be different from previous bilateral meetings. This time, the countries’ presidents will meet at a time of intensive American attention to the US-China trade balance and other economic issues, such as protection of intellectual property rights.

With China’s US trade surplus reaching $200 billion last year, American sentiment is growing to take strong measures. Some have suggested that the trade imbalance is related to China’s currency peg to the US dollar. A recent Congressional bill has called for imposing a 27.5% punitive tariff on Chinese imports.

In fact, the trade imbalance is more complicated than the currency issue per se. Globalisation has strengthened the ability of capital to flow to wherever investment promises the highest returns; likewise, competitive manufactured products from low-wage economies will flow in the other direction. That is why China fascinates American investors, among others, and why US customers buy Chinese products.

To be sure, the exchange rate has an impact on investment and trade. But, even with China’s efforts to loosen the renminbi-dollar linkage, it is arguable whether revaluation could save American jobs or improve the US trade balance. After all, China is not alone: India and other competitive developing countries pose a similar challenge to the US.

Nevertheless, for China’s part, now seems to be a good time to reflect on how to increase its exports’ value-added, as well as focusing on environmental protection and sustainability. Thus, there is scope for a compromise that recognizes both sides’ legitimate concerns. The Chinese government is hastening its shopping spree in America these days, pushing up the renminbi’s exchange rate slowly but steadily. A sensible US policy on China may be to accept gradual currency appreciation, rather than a large revaluation, as America’s economic vitality stems from its own innovation rather than from concessions by the Chinese government.

A more difficult issue for Hu could be intellectual property rights. China’s recent campaign to crackdown on pirating needs to be encouraged, but far more needs to be done. However, while the US government and American companies question whether the Chinese are willing and able to enforce such rights, one must put this issue into historical perspective. Intellectual property protection is related to economic development, so the question should be whether China has reached the stage at which effective protection is possible.

There is a positive side to such problems, however, namely that their very emergence reflects the deepening and broadening of bilateral relations. Indeed, Sino-US interaction has been so strong that the two presidents met five times last year. While those meetings also highlighted trade disputes, they also yielded heightened cooperation and significant accomplishments.

For example, the two states share a common interest in anti-terrorism efforts, and they have been collaborating to ensure container security and combat human trafficking. Their coordinated efforts to divert North Korea peacefully from its nuclear course have also vindicated bilateral cooperation when both sides can define a common security stake.

Similarly, the two countries have a common interest in stabilising mainland China’s relations with Taiwan. The current formula, maintaining the status quo, offers the highest common denominator. With this strategic understanding, there is good reason to expect that Hu’s talks with Bush on Taiwan’s recent termination of the National Unification Council will serve to reduce tensions. China and the US both have much to gain by thwarting Taiwan’s move toward independence.

Nevertheless, to American eyes, other contentious issues are now emerging in relations with China. The recently released National Security Strategy outlines three, in particular: China’s global trade expansion, its military transparency, and its relations with “misruling” states.

The political cost of a serious compromise on these matters would be too high for China, but it does no harm to analyze them and find ways to enhance dialogue. Among the three issues, military transparency seems to be the most sensitive and difficult to address. Nevertheless, given the large size of China’s armed forces, which currently stands at 2.3 million, a rough calculation would indicate that monthly spending per soldier is at most 2,500 yuan on average – too low to recruit and retain competitive staff. But if China wants to raise the military budget to improve the quality of its army, the conflict with the demands of fiscal stability could make military transparency important for domestic reasons, and China might no longer view it as being off limits in its relations with the US.

Above all, we must bear in mind the maturation of Sino-US relations in recent years. A mature bilateral relationship is one in which even difficult issues can be discussed routinely and promptly. There is no question that such a framework has already been established in relations with the US. We will now see how Hu uses that framework – and thus what imprint he leaves on the bilateral relationship – in meeting the current challenges.