China’s Power at Issue in High-Level U.S. Talks


By Steve LeVine and Frederik Balfour
July 26, 2009

While China’s leadership will look for assurances on U.S. inflation, the American team wants to talk about the shape of a global recovery

Climate change, protectionism fears, and questions about how China navigates its rise as a global economic power will dominate the agenda on Monday, July 27, when the Obama Administration resumes a senior-level U.S.-China economic dialogue initiated in the Bush Administration. But few experts expect any serious progress on the main issues separating the two economic giants.

Led by Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner, the U.S. will continue to press China during the two-day meetings to turn its economy away from a reliance on exports and more toward domestic consumption. Washington will push Beijing for a joint approach to climate change and to allow its currency to appreciate.

On the Chinese side, Vice Premier Wang Qishan will push again for assurances that the U.S. is making a priority of curbing inflation in order to safeguard the value of Beijing’s $1.5 trillion in U.S.-denominated reserves. Co-heading the Chinese delegation will be State Councilor Dai Bingguo.

In a briefing with reporters, senior Obama Administration officials suggested that they are not expecting a breakthrough at the Strategic & Economic Dialogue, or SED. Yet experts say the process of the two countries simply meeting, talking, and agreeing—even if vaguely on a senior level—is a value in itself in terms of smoothing frictions.

"The SED is all about warm and fuzzy feelings and verbal assurances that China won’t switch out of dollars, which they can’t do anyway [on a significant scale], and assurances that the U.S. and China will do everything they can to fight protectionism," said Michael Pettis, a professor of finance at Peking University.

U.S. wants synchronized recovery policies

The summit comes two months after Geithner traveled to Beijing and adopted a low-key tone with the Chinese compared with the blunter style of George W. Bush Treasury Secretary Hank Paulson. Paulson initiated the dialogue in 2005, but the Obama Administration is seeking to give China more of a stake in the outcome of broad global issues by adding Clinton, along with political issues such as North Korea, Iran, terrorism, and nuclear proliferation. The shift to a joint economic-political agenda accompanies a diplomatically far more assertive China during the financial crisis, which has fixed attention on Beijing’s enormous new role in the global economy.

One subtext of the talks is a U.S. attempt to synchronize economic recovery policies and a conclusion in Washington that the U.S. economy has permanently shifted—and that China’s economy must change with it. The Administration specifically wants Beijing to temper its reliance on U.S. consumption for China’s economic growth. There has been a fundamental change in the U.S. economy, said a senior Obama Administration official in the briefing with reporters: "Household savings is up, and we are not going back to the way it was in 2006 and 2007. They need to prepare for a new U.S. and global economy."

As they have in previous discussions, the Chinese have signaled that they are worried about the inflationary impact of enormous U.S. budget deficits. "I believe the Chinese delegation, especially Vice Premier Wang Qishan, will explicitly raise the hope that the U.S. should make responsible economic policies, including financial and monetary policies, to maintain stability of the dollar and safeguard the safety of China’s assets," said Zhu Guangyao, China’s assistant finance minister, in a Beijing news conference last week. Zhu said: "China hopes the dialogue could further the negotiation of a bilateral agreement on investment protection, which is still under way."

Beijing plans to buy foreign commercial assets

Accusations of trade protectionism will be a key subject of the talks as well. The Chinese are seeking assurances that its companies won’t be blocked as they pursue investments abroad. Last week the Chinese made explicit what has been apparent for some time: Beijing intends to use its enormous reserves of cash to buy up foreign commercial assets. The Chinese call this policy "going out" and say they plan to accelerate it. "We should hasten the implementation of our going out strategy and combine the utilization of foreign exchange reserves with the going out of our enterprises," said Chinese Premier Wen Jiabao.

A senior Obama Administration official said the U.S. side will make clear that Washington is open to Chinese investment. But, illustrating that jobs and foreign investment are sensitive U.S. domestic political issues, the official repeated at least twice that while Washington welcomes Chinese investment, national security is nonnegotiable.

Recently, the U.S. and the much of the rest of the world have sought trade redress by China more aggressively than they did in previous years. According to a study released on July 23 by Brandeis University economics professor Chad Bown, China was the most frequent target of new World Trade Organization investigations in the second quarter of this year. It was named in 19 of 23 new investigations of products, the report said. In the same period, Chinese exporters were a target in every one of 17 WTO anti-dumping punishments regarding products.

"I believe China especially is quite worried about rising protectionism against its exporters—not only from the U.S. but from the entire WTO membership," Bown said.

LeVine is a correspondent in BusinessWeek’s Washington bureau. Balfour is Asia Correspondent for BusinessWeek based in Hong Kong.

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