Barack Obama, Greta Garbo and China's trade surplus

By Alan Wheatley, China Economics Editor - Analysis

BEIJING (Reuters) - When Barack Obama tackles China on its trade surplus, as surely he will, Beijing will be tempted to invoke the actress Greta Garbo: "I want to be left alone."

As a nascent superpower, China insists on global attention for its political views. On shaping currency and trade policy, by contrast, Beijing has largely stood aloof, content to punch below the weight of what is now the world's third-largest economy.

But 2009 could be the year in which the Garbo defense ceases to be an option. For as much as China might like to keep below the incoming U.S. president's economic radar, there is a growing consensus among experts that a rebalancing of the international economy -- with a central role for China -- can wait no longer.

With the West deep in recession, these experts fear that unless Beijing gets serious about reducing its supersized trade surplus, the China-bashing that was largely held in check during President George W. Bush's eight years in office could finally burst forth into trade and currency wars.

"This year and perhaps for some time to come, trade problems will be an expanding area of friction between China and the United States," Cui Liru, president of the China Institute of Contemporary International Research, an influential think-tank in Beijing, told Globe magazine.

It is China's trade figures for November and December that have set the alarm bells ringing.

Imports fell much faster than exports, underlining the weakness of China's domestic consumption and reinforcing its position as a net supplier of goods to the rest of the world. In emotive words, China is "stealing growth" from others.

"With the world economy struggling as global demand slows, this adds to the risk that trade tensions will worsen between China and its trading partners this year," said Mark Williams, an economist with Capital Economics in London.

DARKENING CLOUDS

Legislative initiatives to punish China unless it revalued the yuan and opened its markets further have been a constant of the U.S. legislative landscape for the past five years. They have gone nowhere, neutralized by the high-level Strategic Economic Dialogue with China created by Treasury Secretary Henry Paulson.

But the economic context has changed dramatically with the deepening of the global credit crisis. The stakes are now higher.

The United States could live with a large trade deficit as long as its private-sector demand was buoyant. However, U.S. consumers are now retrenching to pay off debts, so Obama will have to resort to massive government spending to plug the resulting gap in aggregate demand and to hold down unemployment.

Running big trade and budget deficits indefinitely is not possible, either economically or politically.

Hence the conclusion that any effort to put the U.S. economy back on an even keel has to involve a corresponding rebalancing by China, which ran a surplus of $246.45 billion with the United States in the first 11 months of 2008 and has been increasing its share of the U.S. import market for manufactured goods.

"It is no surprise there is increasing talk that the incoming Obama administration will focus its trade spotlight on China.

"As it is usually the president who restrains Congress when protectionist sentiment strengthens, the storm clouds are plainly thickening," Derek Scissors with the Heritage Foundation in Washington said in a report.

NO MEETING OF MINDS

The problem is that Beijing sees things differently. Why, state newspapers constantly ask, does Washington growl at China instead of thanking it for standing by the dollar and continuing to plough its surpluses into U.S. debt?

Zhang Jianhua, head of the central bank's research bureau, said it was irresponsible of the United States to blame China and other surplus countries for America's ills.

"U.S. policy mistakes and regulatory failings were the direct causes of this financial crisis, and the roots of the United States' massive trade deficit lie in its own economic structure and macro-economic policies," Zhang wrote in the People's Daily, the Communist Party mouthpiece.

Even if Zhang's rhetoric is aimed at a domestic audience, his comments are representative and point up a dangerous divergence in how Washington and Beijing view the world economy's woes.

Moreover, some of China's recent policy actions hardly seem to have been crafted with global rebalancing in mind.

Beijing has launched a 4 trillion yuan ($585 billion) stimulus package to boost domestic demand, but only 1 percent is earmarked for health and education, meaning consumers are likely to keep saving for a rainy day instead of spending on imports.

Most of the money will be funneled into investment, adding to the capacity of factories that may have to find an outlet for their output in overseas markets. And China, desperate to boost growth to hold down its own unemployment, has created fresh incentives for its export industries by extending tax breaks and halting the yuan's appreciation against the dollar.

In short, the tinder is dry for a showdown between Washington and Beijing. It is not inevitable that it will catch fire. Obama enters office with huge goodwill and plenty of political capital to spend. The growing clout of the Group of 20 forum will give him a chance to engage Beijing.

But there is no doubt that the risks of policy missteps are growing by the day.

"In bad times everybody talks more about financial cooperation, but the reality is that in bad times everyone wants to take care of himself first," said Shi Yinhong, an international security professor at Renmin University in Beijing.

"There is a great deal of interdependence, but built into that interdependence there are many potential conflicts," he said.

(Additional reporting by Chris Buckley)