ANN ARBOR—Kenneth Lieberthal, a professor emeritus and senior fellow at the Brookings Institution, returned to the University of Michigan to join ongoing celebrations for the Center for Chinese Studies’ 50th anniversary.

In an interview with the U-M News Service, Lieberthal, director of Brookings’ John L. Thornton China Center, discussed U-M’s history with China and the outlook for the massive country. Here are excerpts:

NEWS SERVICE: U-M has had a long, amazing history with China that dates back as far as 1880 when President James Angell took temporary leave from the university to serve as U.S. minister to China. Since then, several other faculty members have played key roles in U.S.-China relations. How did this happen?

LIEBERTHAL: It is remarkable because Michigan after all is a Midwestern university. It’s not on the West Coast, and it’s not near a huge center like New York City. I think some of this is serendipitous. When President Angell went to China in the 1880s, it was out of his own personal interest.

Before World War II, we had a number of Chinese come to the University of Michigan to get degrees. One of my real pleasures in going to China in the 1970s was meeting Michigan alumni from the pre-revolutionary period, before 1949. They got Michigan degrees and had gone back.

We have three members of the center family, Rich Solomon, Michel Oksenberg and I, who was lucky enough to be the third, to serve as the top person in charge of Asia, including responsibility for China, on the National Security Council under three different presidents: Richard Nixon, Jimmy Carter and, for me, Bill Clinton. So we played a direct role in U.S.-China relations.

NEWS SERVICE: In Washington, lawmakers have renewed calls for China to further revalue its currency. There have also been new threats about tariffs for Chinese exports. Would this be a smart move?

LIEBERTHAL: Frankly, currency issues are ones that almost no one understands except real specialists. It sounds plausible that if China increased the value of the renmninbi vis-a-vis the U.S. dollar, it would correct our trade imbalance. The reality is that for a series of complicated reasons, that’s wrong. It would have a minor impact on our trade balance but not a significant impact.

From the perspective of a member of Congress, it’s politically very attractive because it effectively says that the imbalance in our trade is all due to the Chinese, and they just need to flip a switch to a new policy in Beijing and correct everything. So the U.S. doesn’t have to do anything and we have no responsibility for this. The reality is that it’s much more complicated than that.

I think there are other areas, such market access in China and Chinese investment in the U.S.?a variety of things that are more difficult and more complicated?that are far more important for balancing our bilateral trade relationship.

NEWS SERVICE: What are the prospects for U.S.-China relations? What kind of advice do you give U.S. policymakers about how to deal with China?

LIEBERTHAL: I think we have some very big problems to confront. One of the most significant of those is a lack of mutual trust. We have built this relationship over 30 years and have been more successful than either side would have anticipated 30 years ago. But at the end of the day, neither side trusts the long-term intentions of the other.

The narrative in China is very much that the U.S. is No. 1 and China is no. 2 in the global economic rankings, and the U.S. inevitably seeks to hold down China’s rise and even to disrupt that rise to prevent competition from a rising power.

On the U.S. side, I think we are still looking for a win-win outcome with China. We want to see China rise. We think that holds a lot of opportunities. We certainly don’t want China to fail. We think the problems that would be created by failure are ones that no one knows how to manage. I would say that we want China to rise as a constructive global player.

But if we see over the long run that China sees this relationship in zero-sum terms, it will color our own thinking about where our own interests lie. If a stronger China feels it needs to undercut the United States in order to do what it wishes in the world, that’s a very significant issue. So there are some dangers lurking here.

NEWS SERVICE: We often hear about how China is booming and is expected to soon overtake the U.S. as the world’s No. 1 economy. But what are some of the main challenges that China faces?

LIEBERTHAL: The country has had a streak of economic growth that is the envy of the world. But at the end of the day, they are in deep trouble. They confront dramatic challenges that the leadership is very well aware of and frankly extremely concerned about at this point.

China has followed a development model that is based on several key assumptions. They’ve been good assumptions for several decades but are now basically exhausted.

One relates to demographics. They assumed that they would have an almost unlimited pool of very cheap and very flexible young labor. That pool is now shrinking. Labor rates are going up. Laborers are becoming more demanding. This is moving China out of the low-end of the manufacturing sector.

The second assumption is that China could develop now and clean up later like Japan and so many other countries did. The reality is that China’s environmental catastrophe is so profound at this point that they realize they can no longer afford to develop at such an unlimited cost to the environment.

Thirdly, they assumed the world would tolerate almost unlimited increases in Chinese exports. But ever since the global financial crisis, that absorption capacity is no longer there in nearly the degree they had before.

The bottom line is that right now, there are very, very serious concerns about social stability in China, resulting from inequality in wealth, environmental degradation, all kinds of additional sources of tension.

When China’s leaders look at their country, they see challenges as far as the eye can see. From the outside, it looks like an unstoppable machine. From their side, this is a place that is extremely difficult to manage.

Foreigners go to China and tend to congregate in Beijing, Shanghai, Guangzhou, the big, wealthy dynamic East Coast cities. I think the real way to view China is as a relatively developed, reasonably modern country of about 450 million people who live on islands of relative modernity in a sea of a developing country with a population of over 800 million?and the interaction between these two sides of China is pervasive.

Many of those who visit don’t understand the dynamics of this. Butno leader of China ever forgets about the 800 million and concentrates solely on the 400 plus million. So you need to appreciate this is an extraordinarily difficult set of issues. The problems are more profound than most outsiders realize. I think the leaders have done a reasonably good job of handling it, but this is something that no leader can ignore and no outsider who studies China should neglect, either.