For the first time in their roles as leaders of the largest and second largest economies in the world, Presidents Obama and Xi will meet on June 7-8 in California. The meeting agenda for the two most powerful men on earth is already looking rather nightmarish for their handlers as it may involve a raft of rather difficult conversations.
For starters, there has been an unprecedented string of damning reports suggestive of a cyber Cold War underway between China and the U.S. First, the computer security firm, Mandiant, documented widespread incidents of Chinese hackers infiltrating the computer systems of American corporations, such as Coca Cola and EMC -- even those of the New York Times. More recently, the Pentagon released a report that the Chinese government had directed cyber-hacking to infiltrate U.S. diplomatic, economic and defense industry networks last year. And now, a recent IP Commission Report on intellectual property theft co-chaired by Former Ambassador to China Jon Huntsman finds that China is responsible for up to 80 percent of U.S. intellectual property theft, amounting to about $300 billion in lost exports -- equivalent to all of America's trade balance with Asia.
All of this comes atop of multiple geopolitical tensions with the two countries at opposite ends: President Obama's "Asia pivot" as a direct challenge to China's growing influence in the region; the nuclear stalemate with China and the U.S. allied with opposing sides in the Korean peninsula; and China's territorial incursions against American allies, including Japan, the Philippines and India.
And if the two leaders tire of banging their heads over national security or geo-political tensions, they can just turn to the state of business between the two countries, which isn't doing too well either. Manufacturing, the key to U.S. dependence on China, may no longer be the force it used to be as Chinese wages rise and the Yuan appreciates in value. The cost gap between manufacturing in China versus the U.S. is closing fast, while influential CEOs, such as Jeffrey Immelt of GE, have spoken forcefully about bringing manufacturing back to the U.S. In the meantime, the Chinese market has stopped looking like the golden opportunity it was even a year ago. Yum! Brands, which earned more than half its profits from China, is now struggling with scandals in its Chinese supply chain. Apple posted 67 percent growth in China in a quarter but has faced a string of challenges, from the exposés about human rights abuses in supplier Foxconn's factories to a public apology to Chinese consumers from CEO Tim Cook to, most recently, being crushed by arch-rival Samsung in the Chinese smartphone market. The Chinese slowdown has affected consumer-oriented companies, such as McDonald's and Nike, which depend on China for their growth. Meanwhile, American lawmakers have steadfastly resisted the access of key Chinese players, notably Huawei, ZTE, Sany Group and CNOOC, to the U.S. market.
But, let's look on the bright side. The two leaders have much in common: they both love to dream. There have been numerous speculations of late about what exactly President Xi dreams about in his "Chinese dream." To be the number one economy and rejuvenation of China -- to paraphrase Senior Colonel Liu Mingfu, author of the influential The China Dream -- may come close.
The U.S. is key to both facets of the dream. As a simple measure, consider the fact that at the core of China's drive toward number one status and rejuvenation is its exports machine. The U.S. imported more from China in 2012 (18.7 percent of its total imports that year) than from any other country. The U.S. trade deficit with China grew to a whopping $315 billion in 2012, with a record $425.6 imports from China. Both figures were the highest in history -- and, particularly in light of Europe's struggles, maintaining this trajectory is critical to President Xi's dream.
For President Obama, his famous Dreams From My Father may now be turning to his dreams as a father. In other words, he is at the point when he is looking to firmly establish his legacy. Regardless of what else happens, some facts remain quite clear: China's ascendance has solidified under his watch; the largest foreign holder of U.S. debt is China, which owns about $1.2 trillion, amounting to about eight percent of publicly held U.S. debt; and by the time President Obama leaves office, China is likely to overtake the U.S. and become the number one economy in purchasing power terms.
So, for Obama, a graceful transition that is not considered by history to be his personal failure and surrender of American global leadership is essential. All the near term issues -- from the IRS scandal to the bungling of Benghazi -- will pale into insignificance over the long arc of time compared to how he handles China. An antagonistic relationship with China will not serve his legacy well. Establishing a whole new dimension to American leadership even while ceding the number one economic spot to China will be instrumental in determining how future generations will remember Obama.
So, the two nations will have to share the stage and complement each other. What will be the United States' leadership positioning: Innovation and entrepreneurship? Democratic capitalism? Freedom, human rights, inclusion and justice around the world? President Obama has to make some choices, articulate them clearly and follow through. The beauty of exploring these new dimensions is that China may well be happy to have the U.S. take the lead on several of these fronts.
Recall, the Chinese surge during President Obama's tenure got its kick-start from the 2008 Beijing Olympics, which ran with the theme of "One World, One Dream." Despite the tense lead-up to the summit between the two presidents, they may, indeed, be sharing the same dream even as they find ways to carve up the "one world." Both leaders need to get past the difficult conversations. They must address them, and then get to the main point in the agenda: to find common ground on the issues that benefit both and will lead to specific action.
Bhaskar Chakravorti is Senior Associate Dean of International Business and Finance and founding Executive Director of the Institute for Business in the Global Context at The Fletcher School at Tufts University. He is the author of the book, The Slow Pace of Fast Change: Bringing Innovations to Market in a Connected World.