Secretary of State John Kerry Secretary of Treasury Jack Lew are both heading to China to head up some crucial talks with the Chinese government. With tensions slowly rising over trade, the yuan, the South China Seas, and numerous other issues, these talks could prove crucial to maintaining the ever simmering tensions between the two countries. The talks will take place at the annual Strategic and Economic Dialogue.

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Lew Will Head Up Talks on Yuan

Secretary of Treasury Jack Lew is expected to lead talks on pushing China to allow its Yuan to float more freely. Most believe that a free floating yuan will rise against the dollar. If so, this could help to even out the trade imbalance between the two countries. As it stands now, the United States trade deficit verse China regularly checks in in excess of $300 billion.

An undervalued yuan makes it cheap to buy Chinese products. Since currencies are traded in pairs verse one another, a cheap yuan means a dollar will stretch further when purchasing Chinese-made goods. It also means that American-made goods will cost a lot more for Chinese customers. As such, currency valuations can have a huge impact on global trade and can be thorny issues in bilaterial negotiations.

Most countries allow their countries to “float”, or in other words let market forces determine their value. Of course, there are many ways to influence market prices. China, on the other hand, allows its currency to trade only within a narrow trading band, thus assuring that the yuan never rises or falls too much. Over the last few years, China has gradually been widening the trading band, but many American officials don’t feel they’ve done enough to allow the yuan to appreciate verse the dollar.

Secretary Lew will likely push for faster and more dramatic reform. Lew recently stated that China’s currency is undervalued but failed to specify by how much. Last year the IMF estimated it was undervalued by 10 percent at most, though others have speculated that it could be undervalued by 25 percent or more.

If the yuan were to rise verse the dollar it should help to narrow the trade gap between China and the United States. Chinese goods would become more expensive and American goods would become cheaper. It should also encourage American companies to send jobs back to the United States, which is already a small but growing trend.

Kerry Will Push for Restraint in South China Seas

Meanwhile, Secretary of State John Kerry will likely focus on China’s on-going maritime disputes in the South China Seas and also with the Japanese Senkaku Island. Tensions have been rising as the Chinese have begun to redraw their maps, effectively showing the South China Seas as part of their national territory.

This has drawn the ire of many South East Asian nations with claims to portions of the South China Seas. When China moved an oil rig into waters in dispute with the Vietnamese, protesters began to attack Chinese owned businesses within Vietnam. Meanwhile, the Philippines has invited the United States to reestablish a military presence in the country.

At the same, Japan has been rearming itself and appears to be preparing for a more aggressive stance in the disputed waters. At the moment, Japan is the only country with enough military muscle to challenge China on its own.

The United States has been taking advantage of the tensions to shore up its ties with countries across Asia. While America will look to avoid trying to challenging China on its own, it is looking to create a network of allies across the region who can contain Chinese aggression.

For now, however, Kerry is looking to get the Chinese to back down from its recent spurts of aggression. If nothing else, doing so will signal to potential allies where the United States stands. While the United States has officially stated that it has no position on the South China Seas, it has increasingly urged China to show restraint and on occasion blasted the country for stirring up tensions. This stance could help the US build up allies without causing a confrontation.