US-China dialogue is Paulson's vital legacy
By Jing-dong Yuan
MONTEREY, California - The fifth round of United States-China Strategic
Economic Dialogue (SED) was held in Beijing last week. Initiated in 2006, this
high-power bi-annual event is the last for Treasury Secretary Henry Paulson,
who has led the US delegations of cabinet secretaries and heads of agencies
over the past two-and-a-half years.
Paulson may be remembered for his role in the George W Bush administration's
efforts to salvage the falling US economy with the US$700 billion bailout and
indeed has been criticized for his mishandling of the rescue package. But he
deserves special praise for his steadiness, purpose and stewardship in working
with his Chinese counterparts to promote and maintain a stable
economic relationship between the world's largest economy and its
fastest-developing one.
Paulson strongly believes that engagement with China is the only path to
success in the world of growing economic interdependence and globalization.
Indeed, the SED was launched in late 2006 for the simple reason that China's
rise as a global power presented both opportunities and challenges and these
could best be managed through strategic engagement at the highest levels in
both the US and Chinese governments.
Rather than tackle trade, investment, finance and environment issues in an ad
hoc fashion and through individual ministries with these portfolios, Presidents
Hu Jintao and George W Bush deemed it necessary to develop a dialogue mechanism
that would approach these issues with strategic visions and long-term
perspectives.
The SED has achieved significant results in many areas; most noticeable among
them are energy security and environmental protection, product quality and food
safety, aviation and transportation, trade promotion, and eco-partnership. But
what is most important is that the forum brings together the two countries' top
economic policy makers and over time it can build mutual trust and develop
working relationships between them. Both have benefited from this process.
For Beijing, the SED, like the US-China Senior Dialogue on political and
security affairs, gives China the recognition that it deserves as a rising
power. The SED also serves as an important instrument for managing any
bilateral problems while at the same time focusing on coordinating their
policies in response to regional and global challenges. In addition, the
frictions that arise from increased bilateral interactions in trade,
investments and technology transfers can be addressed through high-level,
coordinated and inter-agency consultation from both countries, instead of via
drawn-out negotiations, threatened reprisals and imposed punitive measures as
was often the case.
Finally, the SED helps to deflect US congressional pressure and threats to
enact legislation against China's mounting trade surplus with the United States
due to China's suspected currency manipulation and export subsidies.
The Bush administration has also found the SED process useful as a channel to
engage Chinese leaders and prod Beijing to take on greater responsibilities as
its weight in global trade and finance grows. Particularly, Paulson and his US
colleagues have gently pushed their Chinese counterparts to allow greater
market access, appreciate the yuan, address product-safety and environmental
issues, fight against piracy and violation of intellectual property rights
(IPR), and advocate greater economic reforms and transparency.
The coordinated approach also reflects a deeper appreciation - certainly by
Paulson, who has dealt with China for decades and has personally visited the
country more than 70 times - of the Chinese bureaucratic system so that issues
can be linked and the outcomes of decisions can address overlapping interests.
While the SED process has encouraged greater dialogue and promoted mutual trust
between the two countries, and indeed has prevented disputes in the economic
arena from spilling into other areas of bilateral relations, it remains to be
seen whether the process itself is sufficient in resolving many of the key
issues, especially from Washington's perspective.
Currency appreciation has been slow and is reversible; China's trade surplus
with the United States stood at $256 billion in 2007 and continues to grow;
enforcement of IPR protection appears to be uneven if not entirely lacking; and
there remain many obstacles to US investments in China, in particular in
financial sectors.
This raises the question whether and to what extent the incoming Barack Obama
administration should continue the SED process if the outcome seems less than
satisfactory. Under such circumstances, and with the US economy in recession,
protectionist sentiments will likely grow, as is congressional pressure to
force China to address the issues that Washington has been most concerned
about. A reality check is necessary here.
While the Chinese economy has grown at phenomenal rates over the past two
decades and now ranks number four in the world, it is still a developing
economy, with millions of people still living under the poverty line and
millions more entering the labor market each year looking for work.
Because of the transitional nature of the economy and the lack of a sufficient
social safety net, China does not have strong domestic consumption and
therefore has to depend on exports for continued economic growth. That creates
conflicts with its major Western trading partners as China accumulates trade
surpluses. A China with massive unemployment and underemployment rates would
have social, economic and political implications far beyond its borders.
An often neglected fact is that while China maintains a large trade surplus
with the United States, it is also the fastest-growing market for American
products. According to ambassador Carla Hills, a former US trade
representative, China is the third-largest export market for the US, which has
seen its sales to China grow by more than 300% since 2000. At the same time,
the US global trade deficit with East Asia has declined from 75% to 49% over
the past decade. In many other, and perhaps indirect, ways, China has also
contributed to the American economy by buying and keeping over $600 billion
worth of US bonds, therefore keeping interest rates low.
President-elect Obama will be facing many challenges when he assumes office
next month, and economic issues will be at the top of his agenda. He should
find China a partner in the global efforts in addressing the economic
challenges facing the international community as a whole. In an interdependent
world of growing globalization, China and the United States cannot solve their
economic woes by acting alone. As Paulson has forcefully argued, engagement is
the only way to success.
Obama has already demonstrated his vision for inclusiveness by assembling a
team of different voices and strong minds, including his former rivals. It
would be wise for him to also heed Paulson's parting advice: expand on the SED
to take US-China relations to the next level.
Jing-dong Yuan is director of the East Asia Non-proliferation Program at
the James Martin Center for Non-proliferation Studies and associate professor
of International Policy Studies at the Monterey Institute of International
Studies
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