By Geoffrey Garrett
Two extraordinary things happened in Washington last week. Years after it was first proposed, the US Senate passed a bill labeling China an unfair currency manipulator. A day later, the US Congress passed the South Korea-US free trade agreement (FTA), KORUS, which had been in suspended animation since 2008.
Chinese attention naturally focused on the currency manipulator bill, and not surprisingly official reactions were immediate, intense and negative. After all, the yuan has appreciated against the dollar more than 30 percent in nominal terms since 2005, about the amount the Senate said the yuan was undervalued by in the middle of the 2000s.
But the chances the Senate's bill will become law are virtually zero. Republican Speaker of the House of Representatives John Boehner has already said the bill is "dangerous" and has been unwilling to bring it to a vote in the House. Though the Wall Street Journal has criticized US President Barack Obama for a failure of leadership in leaving it to Boehner to kill off the Senate bill, Obama will have no choice to veto the legislation if it ever makes it out of Congress.
Why was Obama willing to allow the Senate Democrats to beat up China over currency, knowing this would inflame the Chinese government? The answer is that this was a trade-off for giving Obama something he desperately wanted.
That something else was passage of KORUS, as a package with two other much smaller FTAs with Columbia and Panama. With unemployment stubbornly stuck above 9 percent in the US, congressional Democrats have been in no mood to pass these free trade agreements that were all negotiated by George Bush. Neither, until last week, was Obama.
Obama wanted the deals done for geopolitical reasons, not economic ones. Obama is about to embark on an intense month of Asia-Pacific diplomacy focused on US leadership in regional economic affairs to supplement the US' network of political military alliances. Getting KORUS passed was the essential first step. But his sights are set on China.
Obama's Pacific presidency strategy isn't about military containment of China. Rather its aim is to "socialize" China into Western ways by building a valuable economic institution that China will want to join but that it will only be able to participate in by opening its economy along US lines that China has thus far resisted.
Obama's focus will be on creating a new US-led economic architecture for the Asia-Pacific, while increasing doubts are being cast on the US economic model and the country's willingness to stay engaged in Asia.
Obama will host the Asia-Pacific Economic Cooperation (APEC) Summit in Honolulu in three weeks time. Trade will be at the top of the agenda and KORUS will be in his hip pocket. Obama will then go to Indonesia on November 19 as the first US President officially to participate in the East Asian Summit (EAS), where economic issues will again loom large and so will his new economic alliance with South Korea.
TPP, the Trans Pacific Partnership for free trade, may unexpectedly turn out to be Obama's most frequently uttered acronym on his trip across the Pacific. After two years of intense US-led negotiations with eight relatively small Asia-Pacific economies, Obama would love to announce the completion of the TPP in Honolulu. That won't happen.
But the APEC summit gives Obama the chance to keep the TPP momentum going by announcing that post-KORUS, South Korea will now join the negotiations too. The inclusion of Asia's third biggest economy, with very tight connections with the region's two biggest economies, China and Japan, would give TPP real impetus towards its goal of becoming the template for the long mooted free trade area of the Asia-Pacific.
China and Japan could try to join TPP. But Obama's strategy is to make sure this could only be on US terms. Japan is already interested, but its government knows to get in to TPP Japan will have to sacrifice its long cherished protection of domestic agriculture.
China is already a member of both APEC and EAS. But neither institution makes any binding demands on issues such as intellectual property, market access and the capital account – the US' biggest complaints about the Chinese market today.
TPP would be very different, forcing the Chinese economy to accept a whole series of rules preferred by and largely written by the US. But China will have strong incentives to join if not only the US and other countries like Australia, Malaysia and Vietnam, but also South Korea, and potentially Japan too, are all inside the TPP tent. Focusing on the yuan bill ignores the real long-term goals of the US, and the decisions China will have to weigh.