U.S.-China tension was the underaddressed theme of Davos

    by Adam Lashinsky

    Attendees of the World Economic Forum crave validation. Validation that they learned enough things or met enough people or conducted enough business to justify the time and expense of spending nearly a week in Switzerland. One form of validation, I’ve learned, is to confidently believe one understands the mood of the conference, which by inference is the mood of the world’s elites regarding, well, the state of the world.

    Candidates for topics of the conference that concluded Sunday in the Swiss ski-resort town of Davos include a commitment to alternative energy and climate-change mitigation; banker bashing and the fragile economy; and the rise of protectionism.

    In my opinion, the most important topic was one that received relatively little direct commentary in Davos: the dramatically heightened tension between the United States and China.

    Rather than address the issue head on, most participants danced around it. Plenty of U.S.-China side issues were prominent. As I noted earlier, the dichotomy of 10% U.S. unemployment and 10% Chinese GDP growth featured prominently. The important but wonky topic of the Chinese refusal to revalue its currency received plenty of lip service, though Chinese vice-premier Li Keqiang failed to address it in his widely followed address to the conference. (When I asked David D. Li, a professor of economics at Tsinghua University in Beijing, his opinion of U.S.-China tension, he answered only about the currency dispute, saying he thought China would in fact raise the value of the yuan. This view is becoming less controversial in China, and it’s telling that Li thought it was the only aspect of the relationship worth discussing.)

    Google’s confrontation with China flared up repeatedly. CEO Eric Schmidt was hounded at every turn by Chinese and Western journalists to address Google’s threat to abandon China over its disdain for censorship and belief its computers in China have been hacked. On a panel I moderated, Schmidt said Google (GOOG) wants to stay in China but hopes to exert pressure in order to improve the lives of the Chinese people.

    The Google issue is at once significant and marginal. Yes, the confrontation is real and serious, even if Google is confusing matters by marrying two distinct issues: censorship, on the one hand, which Google embarrassingly and uncomfortably has been cooperating with in China for several years; and hacking, a crime of stealing intellectual property that Google has all but accused the Chinese government of orchestrating.

    Yet the Google affair may ultimately prove to be most analogous to the assassination of Austrian Archduke Franz Ferdinand that started World War I, even if by itself it hardly represented a call to arms. The main issue here is bigger than a currency dispute or a corporate spying incident. It is far more about a confident and increasingly powerful China that increasingly intends to confront, stand up to and otherwise challenge the U.S., which in turn appears weaker and less confident than it has in years.

    The World Economic Forum isn’t designed to address such prickly issues head on. It is important that all nations feel comfortable in Davos and even more important that China be encouraged to attend in ever larger numbers. Where you stand on the issue depends on where you sit. Ian Bremmer, who runs the U.S.-based political-risk consulting firm Eurasia Group, says the looming conflict isn’t a cold war. “Instead, it is economic mutually assured destruction,” he says. “China knows it is coupled with the U.S. But it doesn’t want to be coupled.”

    This coupling featured in Vice-premier Li’s comments when he vowed that China would increase its domestic consumption. The implicit message: China wants to be less reliant on exports, particularly to the United States. U.S. politicians, for their part, take greater and greater umbrage at China’s actions, from Secretary of State Hillary Clinton’s “remarks on Internet freedom” to multiple threats of throwing up trade barriers to America’s biggest creditor. “Both sides will take measures that will be bad in the long term but are politically popular in the short term,” says Bremmer, noting that the Chinese people overwhelmingly support its attacks on the cultural imperialism of the West, just as many U.S. voters support protectionist measures. (U.S.-China tension features prominently in Bremmer's upcoming book, "The End of the Free Market: Who Wins the War Between States and Corporations?")

    Each day brings an upping of the ante. The Chinese have threatened retaliation over a recent U.S. arms sale to Taiwan, exactly the kind of foreign policy move you’d expect from Washington when it sees its interests threatened.

    Important relationships like that of the U.S. and China run hot and cold. It very likely will be cold again next year in Davos. I’m not talking only about the weather.