Geithner To Focus On U.S., China Relationship

Treasury Secretary Timothy Geithner starts two days of talks in China — a country that's long fascinated him. Geithner speaks Mandarin, and even taught the language at one point. Nicholas Lardy, an economist for the Peterson Institute, talks host Jacki Lyden through what Geithner will be doing to shore up the relationship between the co-dependant economies.

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JACKI LYDEN, host:

Treasury Secretary Timothy Geithner is one of the key figures who eased America's number one car company into bankruptcy. Now he's in Beijing to spend a couple days talking with America's number one creditor: the Chinese government.

Geithner is a China specialist. He studied Asian policy in college. He speaks Mandarin and even taught the language at Dartmouth.

Nicholas Lardy is an expert on these sorts of high profile encounters between the U.S. and China; and a fellow at the Peterson Institute for Economics in Washington.

Nicholas Lardy, thanks for being with us.

Mr. NICHOLAS LARDY (Senior Fellow, Peterson Institute for Economics): Thank you.

LYDEN: I'd like to start with a basic question. China already owns about $1.5 trillion in U.S. treasury bills, and you have described that relationship between the U.S. and China, kind of, as that of a crack addict and a dealer. Could you explain what you mean?

Mr. LARDY: Well, we have a habit in the United States, and it's called overconsumption, and the Chinese supply the habit: that is they lend us the money so we can buy the electronic products and IT products, consumer electronics that they make in such large quantities. So it's - each side benefits, and each side finds it difficult to break off the relationship.

LYDEN: What does Secretary Geithner want to accomplish with China this week?

Mr. LARDY: Well, I think several things. I think, of course, he wants to reassure them about the long-term value of the dollar and the plans of the administration to reduce the deficit two or three years from now, when our recovery is well-established.

I think he wants to encourage China to move towards a more consumption-based society, not save quite so much, consume more so their external surplus would be smaller, our deficit with them would get less.

LYDEN: These two economies, ours and theirs, are so intertwined. What does China have at stake here? It's certainly worried about our own deficit.

Mr. LARDY: Well, they're worried about our deficits for fear that it might eventually cause inflation and a decline in the value of the dollar or, at a minimum, a decline in the purchasing power of the dollar assets that they have.

They're very interested in the United States maintained open market so they can continue to sell to us. So there are areas of overlap in terms of common interests of the two countries.

LYDEN: You wonder how much leverage Treasury Secretary Geithner has.

Mr. LARDY: I think quite frankly it's very limited. We always talk about leverage vis-a-vis other countries, but when you get to a big economy like China, who's our biggest creditor, we can certainly ask them to do things, but we can't require them to do things, in my opinion. It's like an individual's relationship with your banker. You don't go and pick a fight with your banker, particularly when you have a big debt outstanding.

LYDEN: How does Secretary Geithner persuade them to keep buying treasury bills?

Mr. LARDY: Well, he has to assure them that the value of the dollar will be stable going forward, but that's a very tough sell because it depends on what happens in Congress, what happens in the budget-making process in the United States over the next few years, and it also depends on what happens in terms of the pace of the global recovery.

So he can make a case that the administration will do its best to cut our deficit starting in two or three years, but it's nothing he can really guarantee.

LYDEN: You know, the timing of this visit is interesting with the anniversary of the Tiananmen Square massacre coming just on Thursday. How might that affect these talks?

Mr. LARDY: I think it's very unlikely to have any effect. I don't think we'll see widespread actions or protests in China on the occasion of the anniversary. The security forces have things buttoned down pretty tight, and there's certainly no reason it's going to come up in the bilateral discussions. And indeed having a visit like this, a high-profile visit like this, will give the Chinese something to show on the television news and other news outlets that will perhaps distract attention from the anniversary itself.

LYDEN: Nicholas Lardy is a China expert with the Peterson Institute in Washington, and he joined us from their offices. Thank you very much for being with us.

Mr. LARDY: Thank you.

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