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High stakes in the talks between Obama and Hu

Chinese President Hu Jintao is meeting with President Barack Obama and other U.S. officials this week. Ravi Ramamurti, Distinguished Professor of international business and director of the Center for Emerging Markets at Northeastern University, assesses the importance of the meeting between the global economic rivals.

President Hu has said that both China and the United States “stand to gain from a sound relationship, and lose from confrontation.” What are some of the ways in which a strong positive relationship benefits both superpowers?

The two sides have genuine differences over what constitutes a “sound relationship,” whether you’re talking about industrial policy, intellectual property protection and exchange rates or Taiwan and human rights. The U.S.-China relationship is thus bound to be rocky, as both sides deal with these knotty issues and adjust to fundamentally new roles in the world economy. At least in the short run, we need cheap Chinese goods and Chinese capital, while they need access to U.S. markets and technology. Both sides would like to see world growth return to pre-crisis levels. A trade war would do neither side much good. Politically speaking, confrontation could spin out of control or undermine economic recovery, leading to undesirable outcomes.

China has the largest population and fastest-growing export market in the world. How can American business owners take advantage of this opportunity?

America’s large companies are already very active in China. In 2010, General Motors sold more cars there than in America. However, most large U.S. firms could be more aggressive in going after the mass market in China’s second- and third-tier cities and rural areas, because they cannot thrive globally unless they thrive in China. The story is different for small American firms, which lack the resources to make a big push into China; many of them are struggling to hold on to their domestic customers in the face of cutthroat Chinese competition. China is good news for these firms only when they have to source cheap parts and components made in that country.

China is the United States’ largest lender. How much of a role does China play in reinvigorating the U.S. economy?

By lending us money, China props up the dollar, holds down U.S. interest rates, keeps inflation at bay and stimulates internal demand. Unfortunately, this arrangement is not sustainable, because China cannot forever be the net producer and saver, and the U.S. forever the net consumer and borrower. We need the Chinese to show the same enthusiasm for U.S.-made goods and services that they show for U.S.-issued bonds and stocks.

The U.S. government accused the People’s Bank of China of undervaluing the renminbi in order to boost its exports. How does manipulating the currency in China affect jobs here?

For U.S. companies that compete directly with Chinese imports — such as steel or tire manufacturers — China’s undervalued currency leads to artificially low prices and patently unfair competition. But the bulk of U.S. imports from China consist of goods, such as toys, footwear or consumer electronics that would be made in Vietnam or Indonesia, not the U.S., if the renminbi were properly valued. Thus, an appreciation of the renminbi may reduce our trade deficit with China but not our trade deficit with the rest of the world. The biggest victims of China’s undervalued currency are Asian neighbors that have not deliberately undervalued their currencies.

President Obama was expected to take a more assertive approach toward dealing with China than he did during his visit to Beijing in 2009. How will President Hu and the rest of the world receive this strategy?

President Hu may not welcome it, but the Chinese sure do respect strength — not humility, compassion or politeness. But the strength has to be real and credible. China knows that America is hurting economically and is militarily overextended. So, President Obama must not overplay his hand, and must be assertive without appearing to be disrespectful. Given the aggressiveness shown by China’s military in recent months, many countries, particularly in Asia, would welcome an assertive United States.

Some international economists say that Chinese loan subsidies make it impossible for the United States to compete with China in green technology. What must the U.S. do to recapture the lead in production of clean energy technologies?

China’s competitiveness in green technologies is partly based on unfair subsidies, which the Obama administration should fight as vigorously as World Trade Organization rules allow. But it also stems from the country’s strong commitment to promote green technologies, which has reduced uncertainty for local firms about future demand and prices. This kind of industrial policy is anathema to the U.S. and unlikely to work here. Therefore, we may not be able to reverse the lead China is gaining in some branches of green technology. Sure, we can resort to protectionism, but that is at best a palliative, not a cure.