Sino-US ties in times of fiscal cliff(2)

Then, there is the issue of automatic spending cuts, which were instituted in August 2011 when Washington lost its triple-A credit rating. The Republicans demand large cuts in non-defense spending as part of any tax deal, whereas the Democrats demand substantial cuts in defense spending. As a result, Republican analysts and neoconservatives will fight the proposed defense cuts, arguing that defense cuts are a threat to national security, while trade hawks will seek to contain the expansion of Chinese companies in the US.

Apart from the debt and spending cuts, there is also the challenge of unemployment, which remains at 7.8 percent. Indeed, there is a temptation to perceive US structural unemployment in the context of "unfair" Chinese competition, innovation, currency and trade policies, and intellectual copyrights issues.

The US unemployment challenge is amplified by the debate over the Bush-era tax cuts for wealthy families making more than $250,000 a year. In the absence of policy changes, the US debt burden will increase by another $10 trillion in the next decade and more than 40 percent of it can be attributed to these cuts.

In reality, Washington cannot afford any tax cuts. In 2010, the federal government's revenue accounted for 15 percent of GDP, but its expenses were almost 24 percent. It is thus clear that the longer it will take to create a sustainable political solution, the greater will be the impasse for the US economy. If the bill for the impending fiscal cliff deal will amount to 1.5 percent and US growth is 2 percent, real growth will stagnate in 2013 - and that's the benign scenario.

The US-China relationship suffers from mutual mistrust, which stems from the two countries' different political systems, economic models and security interests. Also, the US leadership at the Sino-US Strategic and Economic Dialogue is about to change. Veteran Democrat John Kerry will replace Secretary of State Hillary Clinton and Secretary of Treasury Timothy Geithner plans to leave by the end of January. Though government- to-government dialogue is based on institutions rather than personalities, human relationships matter.

On the security side, the two countries should find deeper understanding on the US rebalancing in the Asia-Pacific region, regional maritime disputes, modernization of China's military, international cyber espionage, Iran's nuclear program and the Democratic People's Republic of Korea.

On the economic side, China and the US must come to terms with global rebalancing, trade and investment, intellectual property rights, innovation policies and commitments in the World Trade Organization.

Times of great risks are also times of great opportunities, however. If Washington can finally initiate the impending debt cuts and if Obama can build a legacy as the first multipolar US president, longstanding mistrust could gradually give way to a strategic reset in the most important bilateral relationship of the 21st century.

The author is research director of international business at the US-based India, China and America Institute and visiting fellow at Shanghai Institutes for International Studies (China) and EU Centre (Singapore).