What does the U.S. really want from China?

While China’s expanded holdings of U.S. debt is a sign its export success, Chinese officials point to the other side of the ledger: the extremely low U.S. savings rate. In theory, lower prices of Chinese goods should free up money that American consumers can stash away for a rainy day. But it hasn’t turned out that way.

Instead of saving, American consumers just buy more cheap Chinese goods with money that might otherwise be invested in U.S. Treasury bonds, reducing the amount of debt in foreign hands. In effect, American consumers are living off the savings of foreigners.

And despite widespread concern about its trade imbalance with China, with U.S. unemployment below 5 percent and inflation still relatively tame, it’s hard to identify any immediate economic harm caused by China’s currency and trade policies, said Sinche.

One longer-term solution is to encourage Chinese consumers to buy more U.S. products. That could be accomplished through tougher enforcement of U.S. patents and copyrights in China, where billion of dollars of illegal “knock-offs” of U.S. products help to widen the trade gap.

"We've got to protect intellectual property there," said Mickey Kantor, former Treasury secretary and U.S. trade representative in the Clinton administration. "We have to do something about agricultural access, which is limited in China because of their opaque rules. We have to do something about transparency, bribery and corruption and other issues because they have a frankly weak rule of law in China. There are things to be done there. It needs to move more quickly."

But just as American political leaders face pressure to make changes in China trade policies, Chinese leaders risk political consequences at home if they press too quickly for reforms.

"China can't stop exporting overnight or slow exports too much without jeopardizing its employment situation," said James Barth, a senior fellow and economist at the Milken Institute. "So China knows it has to have more balanced growth. It has to shift more towards consumption (and) rely less on exports, but it can't do that overnight. And that's the concern that China has — it's a domestic concern."

But as China continues to press for more time, there’s a real risk that political backlash in Washington could slow the overall growth of global trade, according to Fred Bergsten, director of the Institute for International Economics.

“With the advent of Democratic control in the U.S. Congress, there is a risk that the U.S. will not have any trade negotiating authority after the middle of next year and could not participate actively in world trade talks," he said. "So I think the risk of  protectionism coming into play is a significant risk to the world economy as a whole."

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