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Year of U.S.-China discord?

by Ian Bremmer and David Gordon

NEW YORK — In 2009, Forbes magazine named U.S. President Barack Obama and Chinese President Hu Jintao the “world’s most powerful people.” In 2010, we will discover that neither has the power to keep U.S.-Chinese relations on track. That is bad news for those who believe that U.S.-China cooperation is essential for reviving the global economy, meeting the challenge of climate change, containing threats of nuclear proliferation, and managing a host of other problems without borders. It is also bad news for America and China.

Ten is the number to watch: America’s 10 percent unemployment and China’s potential 10 percent GDP growth are set to collide like weather fronts generating a storm. American populism will meet Chinese pride. And the fevered political climate created by U.S. midterm elections means that the world’s most important bilateral relationship is headed for real turbulence this year.

America and China now live with a kind of mutually assured economic destruction, and both presidents know it. The U.S. needs China to finance its mounting debt, and China needs Americans to buy its products.

Indeed, the short, sharp shock that China absorbed from the financial crisis has proven that its economic growth still depends on consumer demand in America, Europe and Japan — and will for some time to come. Chinese leaders would like to shift China’s growth model toward greater reliance on domestic consumption, but that is a long-term project. For the foreseeable future, they will depend on local manufacturers to create the jobs that protect both China’s development goals and the Communist Party’s monopoly on domestic political power.

Fear of shuttered factories and lost wages pushed China’s government last year to launch a massive stimulus program to protect jobs and restore growth. It worked. China, with much less exposure than the West to toxic banking assets, is off to the races again as America struggles to its feet.

In a recent Pew Poll, 44 percent of U.S. respondents named China as “the world’s leading economic power.” Just 27 percent chose America. To be sure, an eventual U.S. recovery is inevitable, but job growth usually takes longer to recover. As long as voters are worried about their wallets, Democrats and Republicans will compete to defend American workers. As November’s elections approach, many U.S. lawmakers will demand that the country with 10 percent unemployment persuade the country with 10 percent growth to stop bending trade rules and manipulating the value of its currency.

China’s leadership, for its part, will want to know why free-market champions in Washington are threatening more protectionism. For, as China’s growth accelerates, trade imbalances heighten U.S. frustrations and elections loom, lawmakers of both U.S. political parties will threaten punitive action against China on a variety of subjects.

The Obama administration has already moved against Chinese exports of tires and steel pipes, but this year’s confrontation will extend well beyond trade. When Congress takes up the debate over climate change, for example, and some lawmakers call for a cap-and-trade system, others will demand to know why America should accept binding commitments to limit emissions while the Chinese refuse.

China’s leaders, in no mood to play the scapegoat, will use surging national pride to bolster their position and strengthen their hand in negotiations. The Chinese government has invested heavily in recent years in state-owned companies and privately-owned “national champions,” mainly to ensure that China profits from the power of markets while the leadership controls as much of the spoils as possible. To help these domestic powerhouses increase their market leverage, the government often favors them at the expense of foreign competitors. Hostile U.S. rhetoric and trade action will give China’s leaders an excuse to accelerate this trend.

The Obama administration also wants China to share more of the burdens of international leadership. This includes helping the U.S. to apply pressure on countries like Iran, Sudan, and Myanmar that continue to defy the will of the international community — and with which those Chinese state-owned companies have established lucrative commercial relationships that serve the Chinese government’s economic and political interests. China’s leaders, unwilling to compromise on any issue that might undermine their domestic goals, continue to resist.

A full-scale trade war is unlikely. Both governments know the stakes are too high for both economies, and Obama and Hu will continue to work hard to try to keep things moving in a constructive direction. But neither president can guarantee that recrimination and reproach will not take on a life of its own.

For example, if another product-safety issue involving Chinese imports makes headlines in the U.S., things could move quickly from disappointment to real anger. Most Americans care little about China’s currency policy or its stance on intellectual property rights. But if Chinese-made products threaten their health and safety, there are sure to be opportunistic lawmakers ready to fan the flames.

The 2008 U.S. presidential election was the last in which the overwhelming majority of American voters neither knew nor cared about where the candidates stood on China. Officials in Beijing, increasingly sensitive to U.S. criticism, will prove as ready to trade accusations as goods and services or good ideas. That is why the “world’s most powerful people” will now have a much harder time working together to meet today’s toughest challenges.

Ian Bremmer is president of Eurasia Group. David Gordon is Eurasia Group’s head of research. © 2010 Project Syndicate