Kevin Rudd's energies at this week's G20 summit in Pittsburgh are likely to focus on exit strategies from the GFC-fighting government interventions of the past year and the global financial regulation.

The Prime Minister probably also hopes the G20 will help forge a pre-Copenhagen summit consensus on climate change and revive global trade talks.

But Rudd and other world leaders must be worried that last week's flare-up in China-US trade tensions might derail these critical conversations. The US announced 35 per cent tariffs against imported Chinese tyres on the sole ground that they are costing US jobs. China retaliated with its own punitive tariffs on US auto parts and chicken, and complained to the World Trade Organisation about what it called America's rampant protectionism.

These are the two big forces shaping the contours of the post-GFC world - the meteoric rise of the G20 coexisting with a de facto and conflict-prone China-US G2. The G20 is both small and encompassing enough to provide an overdue patch to the outmoded Bretton Woods system. But within the G20 and beyond, what China and the US do alone, together or in conflict will increasingly define the global bounds of the possible for fixing finance, reviving trade, resisting protectionism and tackling climate change.

Over the past decade, the China-US bilateral economic relationship mushroomed into the largest and most imbalanced in human history. But the co-dependence between the two global titans had the salutary effect of keeping a lid on their nascent geopolitical rivalry. China was willing to provide credit without limit to the US as long as Chinese goods continued to fly off American shelves. The US accepted a gaping trade deficit with China so long as China's appetite for dollars kept American interest rates low.

Now this trade for Treasury co-dependence is seen as an underlying cause of the GFC, and American and Chinese leaders have vowed never again. The Obama administration says Americans must become more Chinese by borrowing less and producing more. The Chinese government says its citizens must become more American by spending more and saving less.

Don't expect these twin transformations to happen anytime soon. Rebalancing the China-US relationship will require nothing less than recoding the economic DNA of the two countries, a process that will take decades rather than years.

Last week's sabre-rattling over tyres and chicken may soon become altogether too commonplace. Against the backdrop of the highest inequality and unemployment since the early 1980s, and with strong Democrat majorities in congress, the pressure on US President Barack Obama to get tough with China is intense. At the same time, China's growth slowdown has focused the minds of its leaders on the need to revive exports.

The stakes could not be higher for Australia. Continuing the China-US balancing act on which Australia's security and prosperity depend so heavily will be a principal strategic focus of what Rudd calls creative middle-power diplomacy. Australia will face challenges from China's desire to use foreign investment to help secure the raw materials it needs and from the US desire to further its strategic objectives at lower cost by asking more of its allies.

In addition to managing its dyadic relations with China and the US, Australia can foster better Sino-American interactions in ways consistent with its broader national interests. This is where the G20 is pivotal. China and the US have stepped up their bilateral diplomacy through their new Strategic and Economic Dialogue. Presidents Hu and Obama, however, have both gone out of their way to insist China-US bilateral relations must be nested in a broader multilateral framework.

The G20 is quickly emerging as their preferred venue. It's the most important multilateral grouping in which China's major power status has been fully recognised, without asking China to play an overt leadership role that it mightn't yet be ready to embrace. The G20 allows the US to further its agenda of encouraging China to become a responsible stakeholder on the global stage, while also lessening European influence on issues of difference with the US.

Rudd is well placed to build on Australia's standing as an effective member of the G20 at Pittsburgh this week. He will hope to contribute not only to the ongoing efforts to chart a course out of the GFC but also to promoting the China-US collaboration this will require.

Geoffrey Garrett is chief executive of the US Studies Centre at the University of Sydney and author of a new Australian Strategic Policy Institute report on the effects of the financial crisis

This article was first published in The Australian newspaper on September 21, 2009.

http://www.usyd.edu.au/news/84.html?newsstoryid=3875

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