Sydney Morning Herald

By Geoffrey Garrett

China and the US will never be friends. But they need each other desperately. Last week's American elections did nothing to alter this key fact of the Asia-Pacific century.

America re-elected the President, Barack Obama, despite record high unemployment because the country agreed now is not the time for fiscal austerity. Meanwhile, the Republicans will have to change their symbol from the elephant to the dinosaur unless they can expand their base beyond southern white men.

The elections didn't change the balance of power in Washington, so continuity in policy seems a given. Expect more Band-Aid solutions to the US's fiscal woes born of an implicit belief the country can grow its way out of debt.

Obama's strategic focus abroad will be on rebalancing American foreign policy towards Asia with a view to influencing the trajectory of China's rise along US lines. But Obama knows the American and Chinese economies are codependent. More active American presence in Asia will be matched with a continuing resolve to ensure tensions with China do not spiral out of control.

Job one for Obama II is the fiscal cliff the US could walk off on New Year's Eve when Bush's post-September 11 income tax cuts and Obama's post-global financial crisis payroll tax cuts will expire and more than $100 billion a year in automatic spending cuts will kick in.

This would halve the US budget deficit. But it would also tip the country, and most likely the world, immediately back into recession.

Despite the vitriol and rancour of the election campaign, few in Washington want to commit suicide. The most likely outcome is a new deal in the shadow of Christmas.

On the tax side, the path of least resistance is to extend the Bush cuts for individuals earning more than $250,000, so long as they qualify as small business owners.

With respect to spending, expect a deal that pushes the pain of cuts further into the future, with lots of grand statements about the need to make the US's true fiscal nightmare, its government-funded aged healthcare program Medicare, more sustainable.

This makes more sense than you might think. The US is demographically the third-youngest country in the Organisation for Economic Co-operation and Development and its welfare state is relatively small. The US remains the world's innovation engine and its immigration magnet. Betting on a return to the 3 per cent-plus economic growth needed to make inroads into public debt seems reasonable.

Of course, like the rest of the world, the US's economic future depends on China's rise. The US benefits from cheap Chinese imports, cheap Chinese credit and the explosive growth of the Chinese market. But China needs the US equally, not only to buy its goods but also for the technology and know-how it gets from American multinationals operating there.

It is this economic codependence that means China and the US will never enter into a second cold war. But Sino-American relations will always be stressful because of the very different world views of the two superpowers.

Obama's rebalancing to Asia is really about shaping the environment in which China will rise in ways that the US prefers. And the US thinks it still has a strong hand to play.

What do Australia, Korea and Japan have in common? One answer is that China is their leading economic partner. But the other answer is that their alliances with the US are the core of their national security.

Obama's strategy is to remind China that while it has lots of big trade partners, the US has lots of good friends as well as allies. This is the best way to understand more marines in Darwin, joint naval exercises with Japan and getting the South China Sea on the East Asia Summit agenda. It also explains why the US has taken up the mantle of creating a proto Asia-Pacific free trade area through the Trans-Pacific Partnership.

The US cannot contain China and isn't trying to. It wants to continue to engage with China and worries it will need to hedge in case China's rise turns malign. But most of all, the US wants to shape China's rise, so that it follows the US-led but widely shared ''rules of the road'' Obama talked about in his speech to the Australian Parliament almost a year ago.

China could oppose regional discussions of sovereignty issues. It could stay outside the partnership. The US is betting that, over time, China will go the other way to become the ''responsible stakeholder'' the Bush administration sought because it is in China's interests, not just the US's, that it does so.

This article was originally published by the Sydney Morning Herald