US and China go bump in the Middle East

By Khody Akhavi

WASHINGTON – For China these days it seems that nothing – not rising energy prices; not sanctions aimed at its more unsavory business partners, Myanmar and Sudan; not even the prospect of a nuclear Iran – can curb its thirst for oil.

As China’s energy needs grow at a rate higher than any other country’s, so too have its economic relationships with the oil-producing nations of the Gulf. Like the US more than 60 years ago, China today is seen as a new and commercially refreshing player, happily unsentimental and – crucially – disinterested in the internal affairs of the region.

As Adbulaziz Sager of the Gulf Research Center notes, “The chief advantage of China’s role in the region is its lack of political baggage.”

With the US mired in its “war on terror”, tied up in knots of its own making, needing desperately to extricate itself from Iraq while preserving its eroding influence, China appears poised to challenge US interests in the region.

But if that has Washington worried, it shouldn’t, says Jon B Alterman of the Washington-based Center for Strategic and International Studies, who has co-authored a new study with John Garver on China’s interests in the region entitled “The Vital Triangle: China, the United States, and the Middle East.”

“The tendency in the US is to see China as a threat or counter to US interests,” he said during a panel on Wednesday, adding that China’s involvement in the region exposes its own national security vulnerability.

“The Chinese lose sleep at night thinking that their energy dependence relies on the Middle East,” he said.

Beijing, which imports half its oil from the Middle East, views political instability in the region as its greatest threat. Often, it is Washington’s policies that precipitate that insecurity, and which Beijing – with no political or military footprint of its own – has been unable to curb.

According to ambassador Chaz Freeman, a career US diplomat and chief interpreter during president Richard Nixon’s path-breaking visit to China in 1972, the Chinese “don’t see themselves as rivaling the US” in the region, yet they are unlikely to “subordinate themselves to us, or underwrite our dominance”.

The status quo presumably makes a strategic relationship between the US and China all the more appealing. While opportunities exist to create a multilateral security framework to reduce tensions and keep the oil flowing, China has been generally reluctant to take on the role of “responsible stakeholder” on the international stage, a term coined by former deputy secretary of state Robert Zoellick.

It is even more cautious in dealing with the issue of immediate concern to the US: Iran’s nuclear program and Beijing’s cordial relations with Tehran.

As Alterman and Garver contend, “China recognizes Iran as a durable and like-minded major regional power with which cooperation has and will serve China’s interest in many areas.”

Iran exports 340,000 barrels of oil per day to China, making it Beijing’s third-largest supplier, behind Angola and Saudi Arabia. China’s investments in Iranian oil infrastructure include a recent deal estimated at US$100 billion to develop the Yadavaran oil field, and the construction of a 386-kilometer oil pipeline running through neighboring Kazakhstan.

From Washington’s perspective, it is Beijing’s technical cooperation on Iran’s civilian nuclear program and China’s continued attempts to deflect pressure on Iran over its nuclear dossier that are most troubling. China’s sale of what Washington considers dual-use chemicals, capable of being diverted to military use, has led the US to sanction some of China’s state-owned companies.

“Nuclear Iran is going to be a game changer in the Middle East,” said Nicholas Burns, former US under secretary of state for policy .

As the Europeans have decreased their economic trade with Iran in response to US-led calls for isolation, Burns said that Beijing has only stepped in to fill the void.

On Monday, the European Union tightened its own sanctions on Iran, freezing assets of the Iranian Bank Melli and imposing travel bans on high-level experts involved in Iran’s nuclear program.

“The Chinese need to understand the primacy of the Middle East for the United States,” he said. “Will China realize it’s on the virtual governing board of the world? There’s a question of whether China sees that role for themselves.”

While Washington awaits the improbable, it seems that Beijing will continue to hedge its bets. It has slowly been persuaded to act on Iran, joining the other four permanent members of the UN Security Council – Britain, France, Russia and the US – in addition to Germany, to offer Tehran a revised package of incentives should it halt its uranium-enrichment activities.

China’s official position states that sanctions will not fundamentally resolve the nuclear issue, and are only a means to persuade Iran to negotiate under conditions agreed on by the United Nations Security Council. Like Russia, the Chinese oppose any move that would lead to an escalation in tensions at the expense of their economic interests in Iran.

But China also wants to avoid a confrontation over Tehran’s program and balances against whichever side – the US or Iran – leans towards it, said Alterman.

“The more the US tips towards war, the more China sides with Iran; if Iran is being confrontational, the more they tip to the US,” said Alterman. “It’s a subtle policy, not what they do, but how they do.”

For Freeman, the erosion of US influence in the region means that Washington won’t be able to set the agenda, or control events as it once did. But that is not necessarily a bad thing.

“What we are witnessing is part of a broad dilution of US dominance,” he said. “If you can’t tell people what to do, then you must persuade them, and that is what diplomats supposedly know how to do.”

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This Recession, It’s Just Beginning

By Steven Pearlstein
Friday, June 27, 2008

So much for that second-half rebound.

Truth be told, that was always more of a wish than a serious forecast, happy talk from the Fed and Wall Street desperate to get things back to normal.

It ain’t gonna happen. Not this summer. Not this fall. Not even next winter.

This thing’s going down, fast and hard. Corporate bankruptcies, bond defaults, bank failures, hedge fund meltdowns and 6 percent unemployment. We’re caught in one of those vicious, downward spirals that, once it gets going, is very hard to pull out of.

Only this will be a different kind of recession — a recession with an overlay of inflation. That combo puts the Federal Reserve in a Catch-22 — whatever it does to solve one problem only makes the other worse. Emerging from a two-day meeting this week, Fed officials signaled that further recession-fighting rate cuts are unlikely and that their next move will be to raise rates to contain inflationary expectations.

Since last June, we’ve seen a fairly consistent pattern to the economic mood swings. Every three months or so, there’s a round of bad news about housing, followed by warnings of more bank write-offs and then a string of disappointing corporate earnings reports. Eventually, things stabilize and there are hints that the worst may be behind us. Stocks regain some of their lost ground, bonds fall and then — bam — the whole cycle starts again.

It was only in November that the Dow had recovered from the panicked summer sell-off and hit a record, just above 14,000. By March, it had fallen below 12,000. By May, it climbed above 13,000. Now it’s heading for a new floor at 11,000. Officially, that’s bear market territory. We’ll be lucky if that’s the floor.

In explaining why that second-half rebound never occurred, the Fed and the Treasury and the Wall Street machers will say that nobody could have foreseen $140 a barrel oil. As excuses go, blaming it on an oil shock is a hardy perennial. That’s what Jimmy Carter and Fed Chairman Arthur Burns did in the late ’70s, and what George H.W. Bush and Alan Greenspan did in the early ’90s. Don’t believe it.

Truth is, there are always price or supply shocks of one sort or another. The real problem is that the underlying fundamentals had gotten badly out of whack, making the economy susceptible to a shock. The only way to make things better is to get those fundamentals back in balance. In this case, that means bringing what we consume in line with what we produce, letting the dollar fall to its natural level, wringing the excess capacity out of industries that overexpanded during the credit bubble and allowing real estate prices to fall in line with incomes.

The last hope for a second-half rebound began to fade earlier this month when Lehman Brothers reported that it wasn’t as immune to the credit-market downturn as it had led everyone to believe. Lehman scrambled to restore confidence by firing two top executives and raising billions in additional capital, but even that wasn’t enough to quiet speculation that it could be the next Bear Stearns.

Since then, there has been a steady drumbeat of worrisome news from nearly every sector of the economy.

American Express and Discover warn that customers are falling further behind on their debts. UPS and Federal Express report a noticeable slowdown in shipments, while fuel costs are soaring. According to the Case-Shiller index, home prices in the top 20 markets fell 15 percent in April from the year before, and Fannie Mae and Freddie Mac report that mortgage delinquency rates doubled over the same period — and that’s for conventional home loans, not subprime. United Airlines accelerates the race to cut costs and capacity by laying off 950 pilots — 15 percent of its total — as a number of airlines retire planes and hint that they may delay delivery or cancel orders of new jets from Boeing and Airbus. Goldman Sachs, which has already had to withdraw its rosy forecast for stocks, now admits it was also too optimistic about junk bond defaults, and analysts warn that Citigroup and Merrill Lynch will also be forced to take additional big write-downs on their mortgage portfolios.

Meanwhile, General Motors, already reeling from a 28 percent plunge in the pace of auto and truck sales, now confronts the fact that it won’t get any help this time from GMAC, its once highly profitable finance arm, which is reeling from an increase in delinquencies on home and auto loans. With the carmaker hemorrhaging cash, whispers of a possible default sent the price of insuring GM bonds soaring on the credit default market.

You know things are bad when middle-class Americans have to give up their boats and Brunswick, the nation’s biggest maker of powerboats, is forced to close 10 plants and lay off 2,700 workers.

For much of the year, optimists took comfort in the continuing strength of the technology sector and exports to fast-growing countries around the world. But even those bright spots have dimmed.

Tech stocks got hammered yesterday after software maker Oracle and BlackBerry maker Research in Motion warned that the pace of corporate orders had slowed.

And both India and China raised interest rates and bank reserves sharply in an effort to tame inflation and slow their overheated economies, even as the air continued to rush out of their real estate and stock market bubbles.

Like the rain-swollen waters of the Mississippi River, this sudden surge of downbeat news has now overflowed the banks of economic policy and broken through the levees of consumer and investor confidence. At this point, there’s not much to do but flee to safety, rescue those in trouble and let nature take its course. And don’t let anyone fool you: It will be a while before things return to normal.

Steven Pearlstein can be reached at pearlsteins@washpost.com.

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