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U.S. President Barack Obama's first visit to China this week will get people talking about how what the world really needs is a Group of Two. Sure, the Group of 20 was only anointed the world's pre-eminent economic policy group in September. But nothing of consequence will get done at the G20 unless the United States and China go along, so why not put them in a room and let them sort out their differences?

The problem with this argument is that the Americans tried that approach and it didn't work so well. Before the financial crisis took over his life, former treasury secretary Henry Paulson's mission was to convince China to speed up its adoption of capitalistic policies, especially a floating exchange rate.

His answer was something he called the Strategic Economic Dialogue. Mr. Paulson convinced the Chinese leadership to hold biannual meetings between their two countries' top economic officials - in other words, a G2. It would be wrong to call the process a failure. Mr. Obama not only kept the dialogue alive, he expanded it to include broader geopolitical issues. But Mr. Paulson miscalculated how easily his dialogue made it for China to deflect U.S. criticism, constructive or otherwise.

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By creating a G2, Mr. Paulson sent a message that he was taking over the China file, even though allies in Europe and Canada were equally distressed by some of the Asian country's economic policies. Politically, that suited China fine. President Hu Jintao's government could dismiss U.S. demands as lectures from a bully that has plenty of problems of its own.

"The previous approach didn't work well," said Gregory Chin, a senior fellow at the Warterloo, Ont.-based Centre for International Governance Innovation and a former Canadian diplomat in China.

Mr. Obama and his Treasury Secretary, Timothy Geithner, are taking away the political cover that Mr. Paulson's G2 gave China. The Obama administration has toned down U.S. criticism of China's economic policies, while subtly making its concerns about the value of the yuan part of the larger debate within the G20 about achieving sustainable economic growth. So now, when China refuses to allow the yuan to appreciate against the dollar just like euro, the loonie and the Australian dollar, it is defying the will of a group of which it is a charter member.

Will this new strategy work? China did indicate last week that it's preparing the ground to allow the yuan to trade more freely, although that could have as much to do with the economic reality of needing to cool a hot economy as with diplomacy. One thing is certain, however: There will be fewer lectures.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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