Hu's Visit: Can Timothy Geithner Prevent a U.S.-China Trade War?

As the U.S. has become a debtor nation, Treasury Secretary Timothy Geithner must tame creditors, of which the most significant right now is a communist government in Beijing

  • Share
  • Read Later
Mannie Garcia / Bloomberg / Getty Images

Timothy Geithner was sitting in his spacious Treasury Department office overlooking the White House earlier this month, mulling the U.S.'s sometimes testy relationship with China. The view wasn't great: China was flexing its military muscles, sticking to a hard line on the valuation of its currency and generally making everyone in Washington jumpy as the state visit by President Hu Jintao approached. Is a trade war possible? Geithner was asked. "A very low probability," he replied, "and I think it's completely avoidable."

But not impossible, he could have added — and with good reason. War is to be avoided, but the threat of war can be useful. The job of the Treasury Secretary is chiefly that of a horse whisperer, to tame skittish financial markets by talking sweetly, if sometimes obliquely, into their ears. But as the U.S. has become a debtor nation (and is likely to remain one for a while), the Treasury Secretary must also tame creditors, of which the most significant right now is a communist government in Beijing. Sometimes that means talking softly; other times it means raising your voice.

Over the past two years, Geithner has been President Barack Obama's top go-between with China on economic matters, the man responsible for mollifying both restive voters nervous about China's rise and the country that now holds $900 billion in American debt. On Jan. 19 in Washington, Obama and Hu held a full day of talks with each other and with top U.S. and Chinese business leaders and went out of their way to celebrate relatively modest progress on disputes over trade and access to each other's markets. But the summit served as much to underscore both governments' uncertainty about whether the U.S., for 70 years the world's dominant military and economic power, can accommodate the reawakened and rapidly growing Chinese behemoth. "Short of a terrorist nuclear attack against the United States," says Kenneth Lieberthal of the Brookings Institution, "managing the rise of China well is the single most consequential development for the U.S. over the coming 10 years."

Geithner, 49, might seem an unlikely choice for such a delicate assignment. During his tenure as Treasury Secretary, he has had more luck making policy than managing politics. But he is better suited to this task than he is widely understood to be. As a Dartmouth student in the early 1980s, he was among the first Americans invited to study in Beijing after the Cultural Revolution. "We were living in isolated foreign-student guesthouses, and the only other kids there were North Koreans, East Europeans and West African socialists," Geithner recalls; there were no refrigerators, and few meals contained meat. Six years after Geithner studied there, his father Peter Geithner opened the Ford Foundation's first office in Beijing. Among those he funded was Wang Qishan, now the Vice Premier and his son's counterpart in the U.S.-China dialogue. Wang's connection to the Geithners "created a common ground," says Peter Geithner, and helped develop "a rapport which is beneficial to both countries." Other senior Chinese officials funded by Peter Geithner include Zhou Xiaochuan, the current head of the central bank.

Timothy Geithner picked up a basic understanding of Mandarin along the way, and though he relies on interpreters in key meetings, he sometimes lets his Chinese counterparts know he doesn't always need them. More critically, his strategy for managing the Chinese is to employ a "receding horizon" approach, pushing them to meet U.S. demands on currency valuation, intellectual-property protection and opening Chinese markets to U.S. goods, then setting new goals once those are met. It's a technique he learned from the Chinese.

At home, meanwhile, Geithner sometimes must resort to a more American style of negotiation: bluster. He took a tougher line on China's currency in the middle of the midterm-election campaign, calling its currency policy "unfair," partly because organized labor and Tea Party backers alike complained that Beijing was walking all over the U.S. No one complained louder than New York Senator Charles Schumer. The two men sometimes descend into shouting matches over China policy, according to some familiar with the conversations. Schumer accuses Geithner of not being serious enough about pressuring China. Geithner tells Schumer he's playing politics with a dangerous issue. But even Schumer's threats can be helpful. "We tell the Chinese that the election makes things worse," says a senior U.S. official.

That may have the virtue of being true. Traditionally, some Democrats have supported protectionist tariffs against countries that manipulate their currencies, like those in a House bill that nearly passed the Senate in the final days of the lame-duck session. But increasingly, some Republicans, such as South Carolina's Lindsey Graham and Maine's Olympia Snowe, do too. And businesses are growing impatient to get a level playing field with Chinese competitors. Says one corporate lobbyist: "Like Congress, the business community is changing."

Geithner believes the Chinese will eventually allow their currency to fluctuate freely against the dollar, which some economists think would help make U.S. exports more competitive and hence drive growth. He thinks central-bank chief Zhou and Vice Premier Wang know such an adjustment is inevitable but are afraid of getting isolated inside China's shifting power structure. While in India last year, Geithner got a call from the Chinese requesting an urgent in-person meeting. Why not just use the telephone? Wang was concerned about being overheard, says one person familiar with the conversations. Geithner flew to Beijing to meet Wang at the airport.

The incident is a reminder that it will take a skilled whisperer to prevent U.S.-Chinese relations from souring. New tariffs aimed at punishing Chinese currency manipulation are possible in the new Congress — Schumer has already introduced a measure — and politicians tied to powerful state-owned industries in China are looking for a reason to start a trade war. As Geithner puts it, "I don't believe you can tell other people what their interests are." Influencing the internal debates in the U.S. and China will be hard enough; reconciling them will be even harder.