Alan F. Holmer Remarks, Chinese Academy of Social Sciences, 7.3.08

Title: “Mutual Benefit: The Fourth Round of the Strategic Economic Dialogue”

(as prepared for delivery)

Introduction

Thank you to Dr. Huang Ping and to the Chinese Academy of Social Sciences for your invitation and for your hospitality. As the national academy of the People’s Republic of China for the social sciences that was founded at the dawn of China’s reform and opening period, your organization has made a tremendously important contributions to China’s growth and prosperity It is a privilege and honor to be with you.

I would like this morning to discuss the most recent Cabinet-level meeting of the Strategic Economic Dialogue (SED), our fourth round, two weeks ago at the United States Naval Academy in Annapolis, Maryland. I would also like to reflect from an American perspective on the contributions of the SED as a framework for U.S.-China economic relations.    

The SED was created in 2006 by President Bush and President Hu.  It provides a high-level forum and mechanism to prioritize issues and articulate long-term objectives, while at the same time manage short-term challenges in our economic relationship.

As we do each time we meet, at this most recent round of the SED, we again grappled with the most important and challenging strategic issues in our bilateral economic relationship.  For nearly two days, nearly a dozen Cabinet Secretaries/Ministers and agency heads from each of the U.S. and Chinese sides met to discuss this session’s theme “A Vision and Agenda for Sustainable Economic Growth.”

The discussions were candid, meaningful, and respectful. The plenary meetings addressed five major areas: managing financial and macroeconomic cycles; developing human capital; seizing the benefits of trade and open markets; enhancing investment; and advancing joint opportunities for cooperation in energy and the environment.  

And while those were the major topic areas discussed in the formal sessions, the SED is also designed to encourage extensive, free-flowing conversations and relationship building. Leaders from both countries benefit from both the focused formal sessions as well as the opportunities to strengthen relationships and communication in the less formal settings.

It’s clear that both American and Chinese government Cabinet officials look at the SED as being about much more than just trade and currency. We share a vision of a strategic initiative that encompasses the full breadth of the U.S.-China economic relationship –energy, environment, innovation, investment, consumer safety and many other issues.

Last fall, many questioned whether American and Chinese officials could realistically expect to achieve meaningful accomplishments because of the political headwinds we faced; first with the 17th Party Congress last fall here in Beijing and then with the National People’s Congress just three months ago; and all this alongside the U.S. Presidential campaign which has come into full motion. Nevertheless, we concluded that there are so many important issues between the United States and China that it would have been irresponsible to allow them to drift without focused attention. Fortunately, our joint approach has proven effective and has achieved important, tangible results despite the challenges.  

Three Areas of Mutual Benefit Promoted through the SED

Before I review the outcomes of the SED, I’d first like to review three objectives the United States has for the Strategic Economic Dialogue that we believe promote mutual benefit. They are the advancement of the U.S.-China economic relationship by establishing new habits of cooperation; the support of China’s next wave of economic reform; and the encouragement and facilitation of China’s participation in the global economic system.

Advancing the U.S.-China Economic Relationship

First, the SED advances the U.S.-China economic relationship by establishing new habits of cooperation.  The history of the U.S.-China relationship is full of misunderstandings of each nation’s positions and motives by the other. The mere creation and sustained attention of the SED demonstrates to the people of both China and the United States, that the United States values a stable, prosperous, and peaceful China. We believe this kind of China is in the U.S. national interest.

I learned a long time ago that if you’re ever going to be successful in any kind of dialogue or negotiation, it is imperative that you do all you can to put yourself in the other person’s shoes, to see the world the way he or she does.  This is the way you achieve win-win agreements, ones that advance mutual interests, agreements that aren’t broken at the first opportunity. 

The SED embraces this approach.  Together, we are modernizing the way the relationship works, and have set a new standard in the ways our countries communicate with each other.   Talk with long-time observers, such as former ambassadors in each of our countries, and they will tell you that our conversations – their frequency, their depth, and their breadth across both of our governments – is extraordinary. 

I wish you could have been there last week to see the quality of the conversation behind closed doors.  The interaction was candid, direct, frank, blunt, yet always respectful. I see the quality of these communications increasing and improving with each SED meeting, as relationships deepen, and even as newly appointed Cabinet officials enter the dialogue.

At this last round of the SED there were few prepared speeches.  Both Secretary Paulson and Vice Premier Wang Qishan frequently raised very challenging questions to participants on both sides of the table. Serious communication and good humor were both shared. And while there were plenty of disagreements, it was clear that both sides agreed that we should not let disagreements get in the way of progress.

The SED is breaking down bureaucratic stovepipes in both our governments.  The meetings are held in plenary session, where all ministers are present and participate.  It is extremely valuable to have all of them, in the same room, joining in focused conversation on issues that have implications for multiple departments and agencies. 

And these new standards of cooperation exist not just among the most senior people in our governments, but also among staff at all levels.

Establishing these new habits of cooperation allows both of our governments to speak to the right people, at the right time, on the right issues, and in the right way – and we’re doing that. 

This intensive forum not only increases mutual understanding but also helps us get things done.  The information and relationships we share lead to understanding, which in turn leads to wisdom in an increasingly effective stewardship of our bilateral economic relationship.  We can never do too much communicating.

Supporting China’s Next Wave of Economic Reform

This leads to the second objective the United States has for the SED:  the support of China’s next wave of economic transition. I have been deeply involved in international economic issues for over 25 years, beginning in the administration of President Reagan – nearly as long as China’s “reform and opening” period. One of the clearest lessons I have learned is that those countries, including the United States, that open themselves to competition, reform their economies, and welcome foreign investment benefit their citizens greatly. Direct investment in another country, such as manufacturing plants or service companies, is the ultimate vote of confidence in that country’s economy.

Such openness is the most reliable path to economic growth and reduction of poverty: it provides better jobs and opportunities, improved living standards, greater consumer choice and lower prices and inflation. Openness is not a zero-sum game; it enhances efficiency, productivity, and competitiveness for all sides. 

There is no better example of this principle than the experience of China.  China’s reform and opening over the past three decades have arguably produced one of the most dramatic economic transformations in world history. It’s vitally important that our policies strengthen and quicken the next wave of China’s “reform and opening” process. The pace of China’s growth and economic reform has clearly been remarkable, but continued effort is needed.

We welcome the efforts of China’s top leaders to transition to an economy that is more market-oriented, less reliant on low-value added manufacturing exports, and that depends more on the skills and resourcefulness of the Chinese people and less on material inputs and natural resource consumption.

We are encouraging key reforms that will help China manage the blistering pace of its economic growth; these include financial market liberalization and a plan for rebalancing the composition of economic growth. China has proven to the world that it can grow fast, but the key issue now is whether it can grow differently and sustainably, where the quality of growth is as important as the quantity.

Bold structural policies are needed to shift China’s growth away from heavy industry, high energy use, capital intensiveness, and dependence on exports – towards greater reliance on domestic demand, production of services, and a greater share of China’s national income accruing to China’s households.

To enable market forces to efficiently rebalance the economy and spread prosperity to all the Chinese, China needs more flexible prices, including a more flexible, market-driven exchange rate. Exchange rate flexibility is also key to allowing monetary policy – the most potent instrument for guiding an economy – to focus on controlling inflation and ensuring financial stability.  As Secretary Paulson has noted, the recent acceleration in the pace of renminbi appreciation is welcome, and should continue.

These reforms are – and will continue to be – resisted by increasingly influential Chinese interest groups, both business and political. However, as Secretary Paulson has said, the greater risk to China’s long-term economic security is not that China opens too fast, but, rather, that protectionists prevail, and Chinese reforms proceed too slowly.

With respect to greater reliance on market forces, one positive example is energy pricing and policy, which has been a major topic under the SED.  Last April, Secretary Paulson delivered a major address at the Chinese Academy of Sciences in Beijing on energy and the environment, arguing for continued moves towards market determined prices for energy in China.  We are pleased with China’s recent steps to increase prices to more accurately reflect the market, and urge China to continue further reforms in the energy sector. 

With the extraordinary growth of its economy, the growth of China’s regulatory and legal infrastructure has not kept pace.  As a result, China faces an array of regulatory and governance challenges, such as IPR protection and consumer safety regulations, and these have been regular subjects of our dialogue.  We have agreed to intensify cooperation on IPR and will continue to focus on rule of law, transparency, innovation, and other similar issues. Indeed, these are matters of mutual interest.

Finally, in the SED we also have had robust conversations about economic developments in the United States and Europe, and the lessons that China may draw from those experiences.  The communication goes both ways.

In terms of the U.S. economy, the weak housing market, combined with high energy prices and stresses in our financial markets, is weighing on economic growth. 

But long-term economic prospects are strong and our economy is structurally sound.  For the first quarter of 2008, growth was slightly higher than most observers anticipated at 1 percent.  The United States also has an economic growth package that is providing a boost to our economy.  This package is delivering to American households $150 billion in payments, which is estimated to create 500,000 new American jobs. 

What are the lessons China can learn from the U.S. economic developments?  Some say the principal lesson is that China should slow down its economic reforms.  But I believe that such a path would have significant negative costs to China.

The financial sector is the central nervous system of any economy, and liberalization helps promote China’s growth and development.  Liberalization also helps China create effective macroeconomic tools to control inflation and manage its economy to promote stable growth.  Moreover, reforms will allow for the most efficient allocation of investment; help rebalance China’s economy to high-quality, sustainable economic growth; provide households in China with higher-yielding assets and more wealth to help them afford healthcare, education, and retirement; assist in the transition to an innovation-based economy; and help address serious demographic challenges, including an aging population.

China’s reforms are critical to its economic growth and development, which is critical to the U.S. and global economies. Our economies are increasingly interdependent; the paths each side chooses will impact the other.

Encouraging China’s Participation in the Global Economic System

The third U.S. objective for the SED is to encourage and facilitate China’s participation in the global economic system. We welcome China’s membership and greater voice in key international economic institutions. At the end of 2007 China contributed for the first time to the International Development Association, the part of the World Bank responsible for providing grants and low-interest credit to the world’s poorest countries. Additionally, China is now collaborating with the World Bank on joint projects in Africa, has recently joined the Financial Action Task Force (FATF) and is negotiating to join the Inter-American Development Bank (IDB).  Through the SED, we have encouraged these efforts and attempted to facilitate China’s integration into the global economic system.

Increased participation will allow China to advance its interests in those institutions, but it is also important that Beijing recognize the responsibilities of greater participation.

China’s increasing and responsible participation in the global economic system is vitally important to our mutual interests because there is not a region in the world nor a major strategic issue where our interests do not increasingly intersect. 

Progress and Outcomes at SED IV

At the most recent meeting of the SED two weeks ago, we announced many initiatives that over time will lead to significant progress on issues of mutual benefit. Two priority areas include investment and energy security and environmental collaboration.

Launch of Bilateral Investment Treaty (BIT) Negotiations

At SED IV, we launched negotiations on a bilateral investment treaty.  Foreign direct investment has been vital to both of our countries. It enhances growth, productivity, and jobs.  Foreign direct investment has been central to China’s dramatic economic transformation over the past decade.  And it has been central to the success of the U.S. economy as well.

And yet American investors in China, and Chinese investors in America, question whether the other country is truly open to investment and provides transparent legal protections. 

The successful conclusion of a BIT would send a powerful and clear signal to the people of our two countries – and to the world – that our two nations welcome investment and will treat each other’s investors in a fair and transparent manner. The United States will pursue a comprehensive treaty based on the U.S.-model BIT, which reflects high standards of investor protection and legal protections for all economic sectors. Our two governments will begin these negotiations soon. We expect to have several rounds of discussions before the next SED meeting.

Ten Year Energy and Environment Cooperation Framework

Secretary Paulson and Vice Premier Wang also signed a Ten Year Energy and Environmental Cooperation Framework, through which the United States and China will collaborate on energy security, environmental sustainability, and climate change over the next decade. 

Energy security and environmental collaboration are areas in which we have a great commonality of interests.  The United States and China are the two largest net importers of oil; last year China accounted for almost fifty percent of total growth in world oil demand; the United States and China account for more than half of global coal consumption; and we are the two largest emitters of green house gasses. 

To meaningfully address these long-term issues requires more than just government-to-government cooperation. Through this Ten Year Framework, our two governments will engage businesses, academics, and leading research facilities in both our nations to jointly explore new ideas, share knowledge, and commercialize new technology.

The Ten Year Framework will center around five areas – electricity and its transmission, air, water, transportation, and conservation of forest and wetland ecosystems. We will also pursue the concept of EcoPartnerships as a potential vehicle for voluntary cooperative initiatives across public and private entities.

Other Areas of Progress

There are also other important areas in which we achieved substantial progress at SED IV.  The United States and China reaffirmed our commitment to continue working together to achieve sustained growth, maintain price stability, and ensure the smooth and orderly functioning of our financial systems, and agree to continue our cooperative approach to information sharing on financial services issues of mutual interest, and to consider further how to deepen cooperation to safeguard global financial stability.

Secretary Paulson provided an update on U.S. financial markets, and described the steps we have taken to address immediate market stresses as well as medium-term steps we are taking to address policy issues arising from recent turmoil. The Chinese reported on steps they are taking to open their financial services sector and further integrate into global markets. The United States and China have reached a number of agreements resulting in further opening of China’s financial services sector:

Through the SED process the United States also recognized that the RMB has appreciated over 20% since 2005, and that the pace of appreciation has accelerated over the past nine months. This accelerated pace of appreciation is welcome and we urge the Chinese government to continue the move toward greater exchange rate flexibility, a crucial tool in controlling inflation and managing the domestic economy. 

Trade and open investment are key sources of economic growth for both of our countries and the world. At SED IV both nations renewed our commitment to work actively toward a positive conclusion of the Doha negotiations.

We also established a Transportation Forum between our two countries that will identify important infrastructure needs across all modes of transportation and enable the free flow of trade in these areas between the United States and China.

The United States and China also agreed to publish in advance for public comment, subject to specified exceptions, all trade- and economic-related administrative regulations and departmental rules that are proposed for adoption, and provide a public comment period of not less than 30 days from the date of publication.

There are many other outcomes from the last round of the SED, whether from the perspective of the United States or China, that clearly demonstrate progress in our relationship. Yet much work remains to be done.

The recent successes of SED IV build on accumulating achievements of earlier rounds of the SED. These have already begun to yield transformational benefits to the people of both our countries. I will cite three brief examples, among many.

In May, 2007, our two governments reached a landmark civil aviation agreement that will double passenger flights between our two countries by 2012 and open each others’ markets more fully to cargo traffic by 2011. As a result of last year’s agreement, we’ve already seen positive results: a new, non-stop flight between Atlanta and Shanghai began in March of this year. More are planned for 2009.

Immediately after the SED concluded, U.S. Commerce Secretary Carlos Gutierrez welcomed the inaugural Chinese leisure tour group of more than 200 Chinese visitors to the United States; this is the result of an effort that was begun at the SED one year ago and concluded with the signing of a memorandum of understanding at the meeting of the Joint Commission on Commerce and Trade (JCCT) in December, 2007. The MOU will boost the U.S. travel and tourism industry, an engine of economic growth in the United States. The MOU allows U.S. and Chinese travel and tourism businesses to create and sell group leisure tours to Chinese travelers, opening China’s growing market to U.S. travel and tourism industries for the first time. We believe the tourism agreement will strengthen the relationship between the people of our two countries. We welcome you to visit the United States.

In the area of consumer safety we agreed to two significant memoranda of agreements in December 2007: one on food and feed, another on medicines and medical devices.  While there have been twists and turns on specific issues since then, we are together establishing a culture of collaboration between our two governments that promotes the welfare of our peoples. We continue to make progress on these issues.

Conclusion

The SED has established an impressive body of work since it was established by the presidents of our countries less than two years ago. And we will continue to build on those achievements as we plan for the Fifth Round of the SED to be held before the end of this year.

While the SED is a Cabinet-level forum that occurs twice a year, it’s much more than that.  It’s also a mechanism in which we record our joint efforts and monitor progress throughout the year.  Between Cabinet-level meetings, there are hundreds and hundreds of meetings, teleconferences, and video-conferences to advance our mutual objectives.  The SED has advanced the U.S.-China economic relationship by establishing new habits of cooperation; it has supported China’s next wave of economic reform; and it has encouraged and facilitated China’s participation in the global economic system.

As we chart the future course of our economic relationship, we would be well-advised to avoid allowing the politics of today affect decisions that go to half-century strategic issues. There is simply no substitute for active engagement and communication.

The economic and geopolitical landscape of the 21st century will be greatly influenced by the way in which the United States and China work together. By remaining focused on the long-term, strategic, transformational issues; by working diligently on immediate and concrete shared objectives; by strengthening these new habits of cooperation; by keeping our relationship on an even keel; the SED has allowed both China and the United States to begin to write the next chapter of our strategic economic relationship.