A currency battle. Accusations of commercial piracy. An emerging strategic rivalry. The United States and China were fairly cordial to each other in George W. Bush's first term as president. But now, with trade tensions rising and both sides examining their long-term interests more openly, the two countries may be entering a period characterized more by competition, if not confrontation, rather than cooperation.

Certainly, the tenor of the relationship has gotten edgier. The White House is demanding that China allow its currency to appreciate against the dollar. The U.S. Trade Representative's Office is dunning Chinese officials about violations of intellectual property laws, and Congress is threatening to impose heavy duties on Chinese imports in response to Beijing's yawning, $162 billion trade surplus. Meantime, Chinese officials are getting prickly about perceived U.S. bullying, and Prime Minister Wen Jiabao told a U.S. Chamber of Commerce delegation in late May that his country would never bow to pressure to revalue its currency.

In years past, when Washington quarreled with such countries as Japan, Korea, Taiwan and Thailand over trade issues, it was doing so with junior allies that had no pretensions of challenging America's superpower status. China is a different matter. It has ambitions of becoming a major power, and it's not a U.S. ally. For those reasons, the United States enjoys far less leverage with its government--and that portends a more fractious relationship in the years ahead. In the tussle over the undervalued yuan, for example, the Bush administration is confronting not only a major source of transpacific trade imbalances but China's wish to replace the dollar with the yuan as Asia's dominant currency.

That's not to say that Beijing won't give way; several prominent Chinese economists are urging the country's leadership to revalue the yuan soon. Xia Yeliang, an influential professor at the School of Economics at Beijing University, recently wrote a paper urging the government to raise the value of the renminbi by 8 percent to 10 percent by this fall--and by another 50 percent within three years. But the men who run China don't like to be pushed around--by outsiders or insiders. To Xia's dismay, his article has not been widely published in the state media, which he attributes to not wanting to look weak in the face of U.S. pressure. "The revaluation issue is sensitive and relates to the state's sovereignty," Xia told NEWSWEEK. "The government won't give up its principles because of pressures from the U.S. Congress."

The trade row is playing out just as the two sides have agreed to hold high-level talks this summer. Deputy Secretary of State Robert Zoellick will represent the United States. China hasn't yet announced who will lead its delegation, but a U.S. official thinks it's likely to be Zoellick's counterpart, Dai Bing Guo, the Chinese vice foreign minister. "The idea is to go beyond our usual talking points and get at issues that [fit] in the nexus of economics and security," says the official. Energy is one example. Both nations are major consumers of oil, and "there is the potential for competition for diminishing resources. How can we avoid worst-case scenarios?"

The White House is not eager for confrontation with Beijing. Though there had been plenty of Bush administration grumbling, it wasn't until two weeks ago, when Congress passed legislation that would slap retaliatory duties on Chinese goods, that the Treasury Department actually demanded that China revalue the yuan. Aids on Capitol Hill say a vote on the legislation, an amendment to a related bill, is expected by the end of the summer. "There was an agreement [in the Bush administration] that U.S. criticism of China would be muted," says Nicholas Lardy, a senior fellow at the Institute for International Economics in Washington. "They were happy just asking China to be flexible on the issue."

In late May the U.S. Trade Representative's Office led talks with Chinese officials over copyright- and trademark-protection disputes. But that's a massive issue, and there's little chance that it will be resolved in a way satisfactory to the United States any time soon. A U.S. Trade official says that part of the problem is that too few American companies have formally complained against alleged Chinese violators; he thinks that's because "they're afraid of recrimination and retaliation from local Chinese government officials." The United States delivered a "tough message" in the talks, says the official, and urged Beijing to end an "epidemic of infringements on intellectual property rights." But taking the matter to the WTO remains a distant prospect. "We need to demonstrate we can be tough on China," he says. But in the future, "you'll see a very nuanced approach from the U.S. government."

Tough and nuanced? If China climbs down on the currency issue, the two countries may yet continue their politely competitive relationship. But as China's economic and strategic clout grows, both sides are all to likely to eschew deference for toughness.

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