Xiao Lian
Playing to each other in the press, the stage was set for
productive diplomacy at the current round of China-US Strategic
Economic Dialogue with US Secretary of Treasury Henry Paulson's
interview in the Chinese newspaper 21st Century Business
Herald and Chinese Vice-Premier Wu Yi's writing in the Wall
Street Journal.
As the second day of the two-day talks unfolds in Washington,
key players not at the table are the US Congresspeople putting heat
on the Bush administration in its China dealings.
Ignoring Congress for the moment, the two countries'
expectations can be summarized as: China and the US should handle
their bilateral issues with an eye on the world economy as a whole
and strategic, long-term and macro-thinking rather than handling
issues with local, tactical, short-term and micro-thinking; adhere
to and implement the principles of the World Trade Organization
(WTO) as best they can and join efforts in opposing trade
protectionism; avoid politicizing bilateral trade issues and
attempts to use trade issues for political gains.
In the first round of dialogue last year, the two countries
reached an understanding that caught the world's attention. But
some US lawmakers still question the framework of the dialogue and
its effectiveness.
Their main argument is that China is achieving economic
modernization (building the world's factory) on two wheels - one is
manipulating the low exchange rate of the renminbi to gain a huge
trade surplus; the other is violating intellectual property rights
(IPR) and stealing other countries' technology to gain competitive
advantages.
They believe these two wheels have been turning faster, not
slowing, since the first round of the bilateral strategic dialogue
last year.
As congressional pressure increased, Treasury Secretary Paulson
came under attack by the "contain China" camp, which accused him of
maintaining good personal relations with Chinese leaders at the
expense of US interests.
Soon afterwards, Washington announced the decision to slap
anti-dumping tariffs on several Chinese glossy paper exporters and
threatened to bring the issue of alleged China's of intellectual
property rights (IPR) violation to the WTO.
Some US lawmakers plan to demand an investigation into supposed
exchange rate manipulation by China and launch economic sanctions
accordingly.
In terms of unilateral measures, the US has put China on the
blacklist of countries to be investigated for unfair trade as
prescribed in the US Trade Representative Special 301 Report and
will apply anti-dumping or anti-subsidy tariffs on imports from
China.
In terms of bilateral measures, the US has signed free trade
agreements with China's trade rivals including Peru, Colombia and
the Republic of Korea to offset China's impact with trade
favors.
In terms of regional measures, the US has Europe's and Japan's
cooperation in tightening their China-oriented economic policies,
especially in China-specific policies on IPR and related export
control, to maintain an advantage over China in science and
technology.
In terms of multilateral measures, the US plans to bring issues
related to bilateral trade and IPR to the WTO if the unilateral and
bilateral measures fail to achieve results.
Of course, the second round of dialogue cannot cover all the
issues, but US concerns will focus on whether Congress is satisfied
with the results of the two-day meeting. In fact, the dialogue is
actually between the Chinese government and the US Congress.
Therefore, it is particularly important for both countries to
have Paulson help steer the dialogue between Wu Yi and the United
States. This arrangement will facilitate communication and
understanding between the two governments. It is important in
efforts to clear up misunderstandings between the two countries
while building mutual trust over economic and trade issues.
The checks-and-balances power struggle between the US Congress
and the executive branch is one of the major factors affecting the
China-US dialogue. Congresspersons answer to the voters in their
districts and the bills they present usually reflect their
constituents' interests.
Some bills relating to Sino-US economic and trade ties may
appear beneficial to local districts but could harm long-term US
interests on an overall and strategic level. They could also hurt
sustainable development of the two countries' economies.
Above all, US lawmakers care about votes. They will say anything
necessary to win votes whether the bilateral trade issue is
appropriate or not.
Thus, one important goal of the second round of dialogue is to
placate Congress. The series of hard-hitting moves taken by the
Bush administration against China was apparently meant to prevent
Congress from passing legislation harmful to long-term benefits
from a healthy bilateral economic and trade relationship.
As for the issue of the renminbi exchange rate, which Congress
seems to believe is key to the trade imbalance, both former Federal
Reserve Chairman Alan Greenspan and current Chairman Ben Bernanke
believe the renminbi exchange rate is China's own business and has
no direct effect on the US trade deficit.
Some members of Congress have linked the renminbi exchange rate
to US-China trade policy, threatening trade sanctions against China
if their demand for revaluation is not satisfied. But the exchange
rate is an economic issue whereas trade policy is political. It
will only complicate the matter if the two are forcibly tied
together.
As China speeds up its economic reform and process of opening to
the world, the internationalization of the renminbi will also
accelerate. Compared with America's mature management of its market
economy, China is still faced with the problems of a weak banking
industry and too many bad debts owed by State-owned
enterprises.
Besides, China also suffers from inadequate domestic
consumption, a widening gap between rich and poor and a growing
population of the unemployed. These economic and social problems
dictate that it is not wise for China to appreciate the yuan too
fast, a move that would seriously affect China's economic
development and hurt that of the US as well.
In fact, US companies with investments in China, including
members of the American Manufacturers' Association, are among the
loudest voices against drastic rises in the value of the renminbi.
An unstable yuan will directly hurt their economic interests in
China.
Morgan Stanley's chief economist and Vice-President Leo Roche
recently pointed out that many fundamental economic factors will
cause trade imbalance between China and the US even if the yuan
exchange rate is raised by a large margin.
For instance, the American people's savings rate has remained at
a meager 1 percent over the past three years. This has forced the
country to tread the trade deficit path. It is relying on growing
imports to sustain economic growth, because only by running a huge
current account and trade deficit can it attract foreign
investment.
The fact that China accounts for a large portion of the US trade
deficit indicates China enjoys a relative advantage in supplying
Americans with the commodities they need. The US has only itself to
blame for the economic problems it is suffering, but some US
politicians refuse to acknowledge this, blaming China. It is easier
to find a scapegoat elsewhere than at home.
In fact, China's foreign trade policies have undertaken
significant changes. The country's 11th Five-Year Plan (2006-10)
states clearly that the country will try to maintain economic
growth and sustain foreign trade balance and macroeconomic
stability by increasing domestic demand, especially consumer
demand.
It will also take effective measures to limit the export of
"energy-consuming, polluting and natural resource-based" products
and increase imports by simplifying procedures. Obviously, it won't
be so hard to solve the issue of the renminbi exchange rate in
relation to bilateral trade imbalance if the two countries both
make some concessions and compromises.
Another bad habit the United States should get rid of is its
double standards. Economists at the Federal Reserve believe it is
more important to appreciate the Japanese yen against the dollar
than revalue the Chinese yuan.
This view is based on the fact that Japan's trade surplus with
the US is increasing faster than that of China's. However, the
Fed's view on Chinese yuan and Japanese yen exchange rates is
different from that of the US Treasury Department.
It is fair to say the Federal Reserve is more realistic. The US
Treasury Department's emphasis on the appreciation of the yuan
rather than on a stronger yen is apparently motivated by political
concerns. This kind of double standard won't help resolve foreign
exchange rate issues.
The other issue that Congress has been heating up is IPR
protection. Personally, I am still of the view I had during the
first round of dialogue. Intellectual property rights constitute a
critical part of the competitive advantages that affect America's
well-being.
No wonder the United States will stop at nothing to protect its
property rights. China is a member of the WTO and will follow the
international rules without question.
When handling the issue of IPR protection, the two countries
should treat three relationships with extra care.
1) The relationship between securing national interests and
fulfilling international obligations. This means they should strike
a balance between protecting sovereignty and being a responsible
stakeholder.
A country's IPR protection can only be as good as a its economic
and social development. The subjects and focus of such protection
change in different stages of development. No one should take a
country's economic and social development out of the equation when
talking about IPR protection.
2) The relationship between IPR protection (monopoly) and market
competition. We should balance the promotion of creativity and
competitiveness.
3) The relationship between IPR protection (monopoly) and the
public interest. This refers to the need to balance the interests
of IPR owners and that of society as a whole. We should oppose both
the violation of IPR and violation of the public interest by
abusing IPR.
The strategic economic dialogue offers an opportunity for the
representatives of the two countries to sit down and try to resolve
WTO-related issues through amicable discussion. I believe, on the
basis of the WTO mechanism for resolving trade disputes, China and
the US will ultimately find a solution to each and every one of
their trade disputes.
The second round of China-US Strategic Economic Dialogue is all
about enhancing mutual trust, reducing friction, reaching
compromises and achieving win-win results.
The author is a researcher with the Institute of World
Economics and Politics of the Chinese Academy of Social
Sciences
(China Daily May 23, 2007)