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High-level Exchanges
Special> Sino-U.S. Economic & Trade Relations> High-level Exchanges
UPDATED: May 28, 2007 NO.22 MAY 31, 2007
Striking a Chord
The recent Strategic Economic Dialogue between China and the United States achieves some results but more talks are apparently needed to iron out fundamental differences

Top Chinese and U.S. economic officials may justifiably take some pride in their recently concluded strategic dialogue. Despite the fact that only

 a few minor agreements were reached, they took a further step toward resolving the two countries'trade disputes in a more rational manner. This is what some Chinese analysts believe, though their reasons vary.

"The dialogue was successful because the talks helped mitigate trade friction, and provided an example of how to prevent trade and economic issues from being politicized," says Yan Xuetong, Director of the Institute of International Studies, Tsinghua University.

Echoing Yan in declaring the economic talks a success, Zhou Shijian, standing councilor of the China Association of American Studies, credits the Chinese delegation for not buckling under pressure mounted by the United States on the Chinese currency; the United States, he believes, forced China to make concessions in some other fields such as opening its market further to U.S. goods with this bargaining chip.

The China-U.S. Strategic Economic Dialogue (SED), a bi-annual event aimed at addressing bilateral and global strategic economic issues of common concern, was initiated by U.S. President George W. Bush and Chinese President Hu Jintao in September 2006.

The second round of the dialogue, held on May 22-23 in Washington, focused on the service sector, energy and environment, the rebalancing of growth and innovation. Co-chaired by Chinese Vice Premier Wu Yi and U.S. Treasury Secretary Henry Paulson, the high-profile dialogue opened as a grand gathering of dozens of ministers and secretaries from the two countries. Chinese economic leaders voiced frustration over recent U.S. restrictions on Chinese imports and U.S. hi-tech exports, and their American counterparts complained about copyright piracy and indicated a growing frustration with Chinese government subsidies.

No politicization

The talks had nearly been scuttled, due to U.S. trade sanctions proposed in March against China, according to media reports, and Wu and Paulson held lengthy private discussions prior to the main event.

During the SED, both sides, it appeared, had adopted a tougher stance to push for change. In his opening remarks, Paulson said the United States was "not afraid" of competition from China, but supported a stable and prosperous China. "Our policy disagreements are not about the direction of change, but about the pace of change," he said. "Americans have many virtues, we are a hardworking, innovative people, but we are also impatient. Even the notion of a ‘dialogue' may seem too passive for America's action-oriented ethic."

Wu said it was in the interests of both countries to improve relations. She emphasized three key points with which this could be done: by opposing trade protectionism, avoiding the politicization of economic and trade issues and seeking ways to handle trade problems as they arise. Solutions to bilateral disagreements will come about as each side focuses on internal solutions, Wu said. Neither side should blame the other for domestic problems, nor pressure the other for change, she added.

She warned that attempts to politicize economic and trade issues should be resisted. "Politicizing economic and trade issues is absolutely unacceptable, since it is of no help but will make the situation more complicated, harm bilateral economic and trade relations or even cause serious negative impact on the progress of overall China-U.S. ties," said the Chinese vice premier.

The two sides failed to make much progress on one major issue ---- the revaluation of Chinese currency (yuan). It didn't help that the Chinese yuan reached a new high against the U.S. dollar during the talks. Just prior to the discussions, China's central bank widened the trading band of the currency from 0.3 percent to 0.5 percent. It was a move seen as more symbolic than practical by U.S. economists, who do not expect the yuan to appreciate dramatically. Some American manufacturers have said that China's currency is undervalued by as much as 40 percent, making Chinese products cheaper than they should be in the United States and making U.S. imports artificially more expensive.

China's goal in the strategic talks was to gain balance in trade, including increasing imports from the United States, Wu said. The import of hi-tech U.S. products has long been a point of contention, given the U. S. restrictions on the same.

However, U.S. Secretary of Commerce Carlos Gutierrez noted that hi-tech exports from the United States to China totaled $17.7 billion in 2006, up 44 percent from the previous year. "We don't see our controls as barriers for the increase of hi-tech exports," he said. "We talked about ways we can build that [technology trade] in specific areas: computer systems, environmental systems, energy products," Gutierrez told reporters. "These are the areas that we agree we can focus on in the future."

Yan of Tsinghua University notes that the two countries refused to compromise on two issues in the SED: the United States' controls on hi-tech exports, and the exchange rate of the Chinese currency. He says if they continue to hold on stubbornly to their views, economic and trade issues will risk being politicized.

The stakes are high in building a cooperative partnership between two of the world's fastest growing economies. Indeed, the relationship between China and the United Statesis is key to global economic stability. Over the past five months, the United States has filed complaints with the World Trade Organization against China on charges of government subsidies and copyright piracy. U.S. regulators have also proposed trade sanctions against Chinese paper imports -- seen as a political move by the Chinese.

Since the election of a new Congress last year, U.S. lawmakers have increasingly complained over the large trade deficit with China. Rumors of a trade war have begun to circulate, and the SED is aimed in large part to avoid a conflict. More than a dozen bills on Chinese issues are pending with U.S. lawmakers. To many analysts, the situation is reminiscent of U.S. trade disputes with Japan two decades ago. Then, as now, the U.S. Congress blamed trade imbalance for the loss of American manufacturing jobs. Many newly elected U.S. representatives promised voters and domestic manufacturers they would get tough on foreign trade issues.

Joint effort

After two days of intensive dialogue, both sides agreed that the meeting had enhanced mutual understanding with much consensus and a wide variety of tangible results.

"Thanks to a great joint effort, the second meeting of the strategic dialogue has achieved great success," Chinese Vice Premier Wu said in her concluding statement. She pointed out that China-U.S. economic and trade relationship is one of the most complicated in today's world. The SED provided an excellent ground and opportunity for both sides to enhance mutual understanding and increased mutual trust on strategic issues, she added.


"While we have much more work to do, we have tangible results for our efforts thus far," Paulson said. "These results are like signposts on the long-term strategic road, building confidence and encouraging us to continue moving forward together."

The two countries held their first SED in Beijing in December last year. Since then, China has taken a series of noteworthy steps. For example, in March, it agreed to terminate the subsidy that allowed major Chinese exporters to receive discounted loans not available to other companies. In April, it announced tax rebates on imported components for advanced equipment. These rebates apply to imports by 16 industries, including large power-generating plants and transmission equipment. Also, China announced on May 21 (effective from June 1) that it will raise export taxes on 142 goods and cut import tariffs on 209 goods to rein in its trade surplus, improve energy efficiency, and promote domestic consumption.

In the weeks preceding the second SED, a Chinese delegation of over 300 entrepreneurs, led by Vice Commerce Minister Ma Xiuhong, went on a veritable shopping spree across the United States, signing 138 purchase and investment contracts and agreements totaling $32.6 billion.

A number of minor agreements were reached during the dialogue, in the areas of financial service, energy and the environment and civil aviation. The two countries also concurred that cleaner energy production would have to be developed. An aviation agreement announced at the dialogue will double daily passenger flights between the two countries by 2012, and air cargo carriers will have greater access to China. American Airlines, Delta Air Lines and United Airlines have all previously announced interest in expanding services to China. The new agreement allows up to 23 daily flights by U.S. carriers, up from the 10 permitted at present.

Another trade agreement reached during the talks provides financing for U.S. exports to China in transactions that exceed $20 million. China also agreed to lift a restriction on foreign firms in its securities industry, and will allow overseas banks to issue credit and debit cards in Chinese currency, according to Paulson.

Mei Xinyu, an expert of international trade with the Chinese Academy of International Trade and Economic Cooperation, believes that while reaffirming their long-term strategic goals, it is extremely important for China and the United States to come up with some specific arrangements in each dialogue. These concrete results, to his mind, would be conducive to garnering domestic support and ensuring that the dialogue mechanism develops in a stable and sustainable manner. He notes that results are difficult to come by as the two countries have to restructure their interests. Given the difficulties, he says, China and the United States should try and pursue solutions acceptable to both countries. "If a solution requires that one party make major adjustments or has significant potential impact on the other, the two parties should seek a proper time when the risk of the potential impact is the lowest," he adds.

"Obviously, some agreements reached in the SED, such as expanding the import of U.S. goods, and launching negotiations on facilitating Chinese group tours to the United States, are not controversial in both countries," he continues. "The decision to cooperate on developing clean coal is expected to bring about enormous benefits, too. However, some agreements, especially the one regarding the opening of China's financial service market, may turn out to be potentially risky for the country."

He believes China's decision to increase the quota for qualified foreign institutional investors (QFII) from the current $10 billion to $30 billion may also trigger domestic suspicion. However, he does not think the actual impact will be as severe as most people believe.

Other experts, however, tend to downplay the importance of these agreements. Yan points out that the agreements in specific areas were mostly cosmetic. It is his belief that the SED was significant in that the two sides expressed a political will to resolve their trade friction through dialogue. The principle consensus reached was far more important than the minor agreements.

Niu Xinchun, a research fellow with the China Contemporary Institute of International Relations, also underlines the importance of strategic dialogue between China and the United States, given the two countries' vastly different evaluations of their economic relations. In an article published by People's Daily, he observes that while China views the two countries' relations as healthy and positive on the whole, the United States seems to see more negative factors than positive ones. Chinese statistics show that two-way trade volume increased 106-fold between 1979, when bilateral diplomatic ties were normalized, and 2006, an average increase of 18.9 percent year on year. In the past decade, commodities exported from China have saved an estimated $600 billion for U.S. consumers. The jobs of 4 million to 8 million Americans are closely connected to Chinese-U.S. trade, many of which are created by retailers of Chinese goods. In light of these figures, Niu says, economic and trade ties between China and the United States have admittedly been mutually beneficial.

The two countries also have different perceptions of the root causes of their economic problems, according to Niu. The Chinese side holds that the United States' trade deficits with China result from global influences and the U.S. trade policy towards China. However, America attributes the trade imbalance to China's artificial depreciation of the value of its currency, and its tendency to subsidize exports. There is no other way, he states, to resolve the economic and trade problems between China and the United States except through consultation and dialogue, and the SED is the most important mechanism in this regard. He notes that some organizations in the United States intend to gain political mileage by taking advantage of the economic and trade problems between China and the United States.

Niu says this politicization is detrimental to the interests of both countries, adding that understanding the nature of economic and trade problems from a strategic perspective is a precondition to resolving specific hurdles.

"And that's precisely why the SED is so widely scrutinized," he concludes.

(With reporting by Corrie Dosh and Chen Wen from New York and Washington D.C.)

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