How to Save Trade Partners That are Too Big to Fail

America and China accounted for half of global GDP growth last year. To stay strong, they must work more closely together. America, still the global leader, needs to take charge. Karabell sees five ways the U.S. can strengthen the one trade partnership that is too big to fail.

SHRINK THE SEVENTH FLEET. For most of the Cold War, the Seventh Fleet protected Taiwan and kept the peace in Asia. Today, Taiwan is seeking closer ties with China, and Japan is preparing itself to cede geopolitical leadership to China. The Seventh Fleet is an irritant that couldn't engage in a major confrontation with China at current force levels. As it did in Germany after 1989, the U.S. should pull back.

LEAVE THE PIRATES BE. For years the U.S. has pushed China to crack down on pirated copies of American software and movies, yet the markets of Beijing are still piled high with bootleg DVDs of Hollywood films. No U.S. business has cut the pirates' take or pulled out because even if the bootleggers take 25 percent, 75 percent of China is still big business. This battle is a dead end.

LET CHINA BUY AMERICAN COMPANIES. Since 2005 the U.S. has blocked Chinese attempts to purchase 3Com and Unocal, on flimsy security grounds. Now China is counterpunching, against Coca-Cola and others. The U.S. should reset the tone of the relationship by focusing on innovation, not security, and selling China what it wants, including companies.

COORDINATE INTEREST RATES. Given the trillions of dollars in cross-investments, the Fed and the People's Bank of China should at least begin to discuss how to set rates that would best suit the needs of both sides of this hypereconomy, rather than maintain the pretense that they remain two distinct national economies.

PAY FOR CLEAN CHINESE COAL. China will soon surpass the U.S. to become the leading source of greenhouse gases. With 75 percent of China's energy coming from coal, clean coal is the key—but Beijing says it's still too poor to pay. The U.S. needs to lead the effort to help because China's pollution threatens the entire planet, America included.

© 2009