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A tough decision: Poke the dragon?

Next month, Obama must report on whether China is manipulating its currency.

Analysts remember that the greatest damage caused by the Great Depression was not economic, but “political … it was World War II,” noted Stephen J. Stedman, a senior fellow at the Center for International Security and Cooperation at Stanford University. As Western and Asian titans tend to their own domestic political concerns, throwing up trade barriers or frustrating attempts to break the recessionary cycle, extremist forces in poorer nations may find new believers.

“In emerging and developing nations, desperation among unemployed youths can turn into acts of terrorism … spawn uprisings and be the cause of coup d’etats,” said Democratic Rep. Diane Watson of California, a former U.S. ambassador, at a recent House Foreign Relations Committee hearing.

Foreign policy analysts worry that the recession could sap western enthusiasm for expensive forays in Afghanistan; for needed aid to Pakistan, the Palestinian territories, Africa and other danger spots; for plans to limit global warming; and for liberal trade agreements.

“China — are they going to take advantage of this situation worldwide to expand their political influence?” asked Republican Rep. Ted Poe of Texas, reciting a litany of challenges. “Russia — are they going to use their global influence during this crisis to move into former Soviet states? Iran — is the energy crisis affecting the stability of the Iranian government? Mexico — the economic crisis there and the drug war … has led some to warn that ungoverned areas of that country may become sanctuaries for terrorists.”

Republicans are already describing Obama’s proposal for a cap-and-trade system to limit carbon emissions as a tax on industry that will cost jobs. Democrats are pressing for “Buy American” provisions to protect U.S. manufacturers. And members of both parties voice alarm at the administration’s suggestion that it may take hundreds of billions of dollars — on top of the trillion-plus already appropriated — to stimulate the U.S. and world economy.

The April 15 call on China may offer a glimpse of just how pressed the White House is by domestic political considerations.

The Chinese contend that because wages are so much lower in China, a revaluation of the currency would have just a minor impact. But a bipartisan coalition of U.S. lawmakers is loudly insisting that China is practicing protectionism.

Obama raised such get-tough trade issues during the presidential campaign. And in his confirmation hearings in January, U.S. Treasury Secretary Timothy Geithner agreed with those who charged that China was manipulating its currency. But Geithner has since pulled back from a confrontation, and joined with the G7 finance ministers in Rome last month in issuing a conciliatory statement.

“These institutions — the World Trade Organization, NAFTA, our relationship with China — have never been tested in this sort of environment,” said Edward Alden, a senior fellow at the Council on Foreign Relations.

“It’s a fact that China manipulates its currency,” Alden said. “But if we make that designation it immediately puts us into a confrontational position … and I think that will start the relationship between this administration and China off on a very poor footing.” 

Read more about China and the economy:

China's economy: 7 little words

Peasant revolution 2.0

AIG: Adventures in geopolitics

Mr. Geithner goes to Horsham

For more on the global economic crisis:Click here for the full report