Considering the current state of U.S.-Sino relations–scraping their lowest point since the Tiananmen Square massacre–it’s remarkable that the “accident” didn’t erupt into a full-scale international incident. The PLA actually sat on the news of the U.S. “spies” for three days–perhaps to avoid embarrassing Foreign Minister Qian Qichen, who knew nothing of the incident when he sat down last week in Brunei with Secretary of State Warren Christopher. Not that the 90-minute talk accomplished much beyond a promise to hold further talks. China wanted, but didn’t get, assurances that Lee Teng-hui, Taiwan’s president, would never again be issued a U.S. visa. The United States tried, but failed, to spring Harry Wu, the Chinese-born U.S. human-rights activist who is in prison facing spy charges and a possible death sentence. Larger issues–a future summit between Presidents Clinton and Jiang Zemin, a new road map for a long-term strategic partnership-are still on hold.

This is a critical moment in the relationship, given America’s economic and security interests in Asia–and China’s own iffy political situation as paramount leader Deng Xiaoping lies dying. The alliance is burdened by mutual misunderstanding and contradictory goals and inflamed by domestic politics (read: hard-liners) in both capitals. Cooperation is more difficult than ever because of Washington’s inconsistencies–is the policy to engage or contain China? are trade deficits finally more important than human rights?and Beijing’s predisposition to interpret every U.S. move as an attempt to weaken, divide and isolate the Middle Kingdom.

Chinese paranoia long predates Lee’s visit to America in June. Beijing still blames Washington for China’s failure to be named host of the 2000 Olympic Games, a huge blow to its international prestige. Despite an estimated $28 billion trade surplus with this country, China sees a plot by the United States to cripple its fast-growing economy. In that narrow view of American intentions, trade sanctions, threatened in February to curb widespread Chinese piracy of U.S. intellectual property, become a declaration of economic war. By the same logic, China misreads its own failure to qualify for membership in the World Trade Organization as a U.S. attempt to deny it a rightful place in the global marketplace. The Chinese also suspect U.S. efforts to check them militarily. Beijing believes that Washington has conspired to turn the security arm of the Association of Southeast Asian Nations into an anti-China club. And how else to interpret the recent U.S. recognition of Vietnam, an ancient enemy, but as a way to block Beijing’s growing influence in the South China Sea? “Everything looks to the Chinese like a strategy of containment,” says Robert Manning, a Sinologist at the Progressive Policy Institute.

Nothing raises nationalistic hackles like the subject of Taiwan, which China considers its own disobedient child. By granting a visa to Taiwan’s president, Washington seemed to betray the most fundamental premise of its 1972 pact with Beijing–a one-China policy. And because China is in the middle of a difficult succession struggle, America’s timing couldn’t have been worse. Deng often overruled the military to keep Sino-U.S. relations on track. None of his potential heirs enjoys that power. “If yon want to be the next leader of China, you don’t want to look soft on certain issues that touch on sovereignty,” says a senior Clinton administration official. That means playing to the PLA, which reportedly criticized President Jiang for being too kind to Taiwan and too slow to condemn Lee’s visa. “There are elements in the military who don’t want the Foreign Ministry to patch things up with the United States,” says a Pentagon official.

The U.S. Congress has played a parallel role. Capitalizing on the administration’s indecision, Republican legislators have hijacked America’s China policy lately. Two months after forcing Clinton to reverse himself and issue the visa to Lee Teng-hui, some GOP leaders called on the United Nations to reinstate Taiwan–and on the White House to switch diplomatic recognition from Beijing to Taipei. “The Chinese government’s nightmare came true in November,” says William Triplett, a Sinologist who counsels influential House Republicans. Conservatives are inflamed by what they regard as China’s brazen expansionism: reportedly selling missiles to Pakistan and Iran, laying claim to the disputed Spratly Islands, making mock target practice of Taiwan. The jailed Harry Wu, friend to many Republican lawmakers, has become an emblem of Beijing’s tyranny. “If China doesn’t become democratic before it becomes militarily strong,” says Triplett, “it’ll be a problem for us sooner rather than later.”

But containment alone won’t force China to become democratic. As Washington develops a post-cold-war partnership, moving beyond the view of Beijing as a onetime counterweight to Moscow, it must contend with a nation quite unlike America. China will likely remain communist, stubbornly Confucian and increasingly ambitious. But with vital interests in common, the two countries will simply have to keep talking.