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Zachary Karabell -- Obama and Chinese president meeting should cover new topics

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By Zachary Karabell
Sunday, November 8, 2009

When President Obama sits down next week with Chinese leader Hu Jintao in the Great Hall of the People in Beijing, the two are likely to cover the familiar terrain that has marked relations between their nations: the global economy, currency and trade disputes, carbon emissions and the upcoming Copenhagen summit, and, of course, Taiwan.

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All important stuff, no doubt, but also a bit predictable, isn't it? Frankly, the fusion of these two massive economies demands a more daring approach. Hundreds of billions of dollars in annual trade, trillions in loans and investments, and two decades of ever-closer integration have transformed both countries, and the mutual dependence has only deepened during the financial crisis of the past year. Another summit-as-usual won't do. So here are a few suggestions for what Obama and Hu should really be talking about:

First, it's time to form a joint central bank. This won't happen overnight, but in some ways, the process has already begun. Loans and capital flows have undermined the ability of the Federal Reserve to determine interest rates and monetary policy unilaterally. Since 2001, the Fed has moved short-term rates from 1 percent to more than 5 percent and then down to zero, yet the rate on the 10-year Treasury note -- set by market forces and increasingly by Chinese purchases -- has stayed mostly within a relatively narrow band, between 3.5 percent and 4.5 percent. Central banks still matter, but they are severely constrained by global capital flows and mutual dependency.

Rather than maintain the fiction of control, a joint Sino-American central bank would determine interest rates and currency pegs. The Fed chairman and voting members of the Fed's board of governors would sit alongside the head of the People's Bank of China. This transnational entity would meet regularly, and the two staffs could merge (or at least mingle).

If anything, such a joint committee would be even more important to China than to the United States. As a debtor nation that relies in part on Chinese loans, the United States needs to calibrate rates and its level of debt to meet the needs of its creditors, China above all. America in turn is China's largest market, and the Chinese renminbi is pegged to the dollar. China's vast dollar reserves gain or lose value depending on which direction the greenback moves, hence China has a vested interest in shaping the currency and interest rate policies of the United States.

Next on the agenda: Give up on intellectual property rights. The United States spends an inordinate amount of time staging a rear-guard action against China's infringement of patents and other intellectual property. Successful American businesses operating in China, however, have learned that trying to protect intellectual property wastes time and energy, and they're better off reinvesting in research and developing new products. Chinese firms excel at copying but not yet at creating. As a result, smart foreign companies realize that the lasting solution is innovation, not courts and lawyers.

Joint ventures between Chinese and American companies often stipulate that the latter share a certain percentage of the intellectual property. The more they cede, the sweeter the deal. Many U.S. companies take the stance that in the three to five years it would take their Chinese partners to replicate their more intricate products and processes, they can create the next generation because of better research and development. Yet the issue remains a live wire, particularly in Congress, forcing the Commerce Department to take grievances to Beijing. Total waste of time.

Issue No. 3: Give the Chinese greater access to the U.S. market. As China becomes richer, and as its currency gradually strengthens, it will want to buy more stuff, especially in the United States. But whenever Chinese companies want to buy technology companies such as 3Com or resource companies such as Unocal, they face a gauntlet of U.S. regulations on potential "dual use" technologies or other national security hurdles. Even other deals, as benign as the sale of an appliance company, have faced scrutiny on Capitol Hill.

But one way to bring back all that cash America has exported to China is precisely by selling American assets to Chinese buyers. Such investments will bind China even more closely to the United States, aligning our interests. The onerous requirements of vetting and approving deals in Washington should be narrowed to specific military technologies; otherwise, let China buy what it wants. In return, Beijing must continue to expand the sphere of what U.S. companies can acquire in China.

The environment is No. 4. The United States and China are the top two emitters of greenhouse gases, and global efforts to reduce them are useless without these two nations working together. China, however, wants the United States to take responsibility for the emissions of American-owned factories in China, while the United States wants China to reduce its use of coal (and China wants the United States to subsidize the costs of doing so).

Without a clear path forward, let's forget communiques and bilateral agreements and develop a true joint climate policy. That would involve regular meetings and annual targets that might be set by some combination of the Environmental Protection Agency and China's Ministry of Environmental Protection. Given that a significant portion of China's emissions result from American companies manufacturing goods there, and given that the cost of U.S. energy consumption is shaped by China's hunger for resources, the two nations must coordinate policy and action, including emissions targets that adjust over time -- with China bearing a larger share of the burden as it becomes ever more energy-intensive.

The Obama administration is committed to alternative energy and smart grids; Beijing has announced an ambitious agenda of high-speed rail, solar energy research and deployment, and next-generation nuclear reactors. Think of how much more could be done if their efforts and spending were combined, and they invested together in new energy technologies and shared the fruits of that R&D.

Finally, lose the old military mind-set. Japan and Taiwan have tethered their futures to China, which makes the presence of the U.S. 7th Fleet as anachronistic as U.S. troops in Germany were after the Berlin Wall fell. Obama and Hu should agree that Japan can take care of itself and that Taiwan, far from the flashpoint it was during the Cold War, is becoming more like Hong Kong -- autonomous, different, more open, but tied to Beijing.

These proposals may sound outlandish, but they have a precedent: the European Union, which in its early stages struck many as equally unrealistic. Said one British diplomat when the first of many European agreements was proposed in 1957: "The treaty has no chance of being signed; even if it is signed it will never be ratified; even if it were to be ratified it will never be implemented."

For all the faults of the E.U., the Europeans understood that sometimes it's best to relinquish some state control for greater security and prosperity. Today, the emergence of China as a first-rate economy offers a similar opportunity. Things that were once thought impossible will happen, but only if we have the vision and the will to make them so.

Zachary Karabell is president of River Twice Research and the author of "Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It."


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