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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)