Economic uncertainty at home for both sides casts long shadow over proceedings

PUBLISHED : Tuesday, 11 December, 2007, 12:00am
UPDATED : Monday, 27 June, 2016, 11:51am

In sharp contrast to the optimistic mood before the past two China-US strategic economic dialogue sessions, tomorrow's third round comes at a difficult time for negotiators, with both economies facing challenges.

The United States is grappling with the fallout from the subprime mortgage loan crisis, and administration officials are braced for a possible recession ahead of next year's presidential election. China, meanwhile, is struggling to tackle inflation and economic overheating, only months ahead of a major reshuffle of the country's top economic leadership.

When Vice-Premier Wu Yi , who is expected to retire in March, meets US Treasury Secretary Henry Paulson tomorrow, little is likely to be decided.

'Compared with the previous talks, the upcoming ones will be tough as both economies are facing challenges and uncertainties ahead, although their problems are quite different,' said Lu Xiaobo, director of Columbia University's Institute of Oriental Studies.

The top-level talks on economic issues between the world's most powerful economy and its largest developing one, initiated by President Hu Jintao and his US counterpart George W. Bush last year to deal with broader bilateral relations, are meant to focus on strategic issues.

But more often than not, they are occasions for the US side, reacting to domestic political pressures, to badger the Chinese, on issues ranging from the value of the yuan to America's bilateral trade deficit, the protection of intellectual property rights and, most recently, product safety.

'While officials and economists are more sophisticated about Sino-US trade issues, the Democrat-dominated Congress and the general public have blamed China for all the US' economic problems and demanded the administration act more forcefully to get China to halt what they see as unfair trade practices,' Professor Lu said.

In a speech in Washington recently, Alan Holmer, the US Treasury's special envoy to China and the strategic economic dialogue, underscored three core US objectives. The first was to establish 'new habits of bilateral co-operation' between the two economic powers, the second was to hasten the pace of reforms by China, and the third was to encourage China to act as 'a responsible power'.

Mr Holmer, who visited Beijing last month to finalise the agenda for the third round, said issues to be taken up included access for foreign financial services companies, the value of the yuan, movement towards a consumption driven economy, and co-operation on food safety and energy and environmental topics.

'Trade and currency issues are always high on the agenda at Sino-US discussions,' said Jing Ulrich, chief of JPMorgan's China Equities.

According to US statistics, the bilateral trade balance was US$233 billion in China's favour last year and the US trade deficit with China is set to top that record figure this year.

Professor Lu said most Americans saw the imbalance as a simple consequence of an undervalued Chinese currency that allowed the Chinese to sell more and Americans to sell less.

Analysts said the value of the yuan was likely to be the dominant issue at the third round of dialogue, but it was unlikely that any breakthrough would be reached.

In the past, the two sides have emphasised the need to 'deepen understanding' and this latest round threatens to be no different, despite calls from US senators and congressmen for the administration to take a series of harsh measures - from punitive tariffs on Chinese imports to invoking obscure trade laws - to punish China for 'currency manipulation'.

Top Chinese and US negotiators all came out to warn against protectionist sentiment over the weekend because of fears that low-key outcomes from the dialogue could trigger louder US calls for protectionism.

'The danger is that there are about a dozen China-related bills under consideration in Congress, some of which are highly likely to be passed in coming months, in view of the administration's declining influence in the Democrat-dominated Congress and the fact that Mr Bush is a lame duck now,' Professor Lu said.

Ms Ulrich said the US would continue to push for faster appreciation of the yuan while China would, in response, reiterate its commitment to a 'flexible but stable' currency policy.

Professor Lu said the US would apply even greater pressure, because while America was facing a recession, China's trade surplus with the US rocketed ahead in the second half of this year. He also said next year's presidential election would see Sino-US relations become a political battleground, fuelled by US concerns over a recent string of scandals involving the quality of mainland-made products.

'At such a juncture, the administration is more eager to see results to pacify discontent in Congress and among the general public,' Professor Lu said.

Ms Ulrich said Americans would push for more access to China's markets, including in the telecommunications and financial sectors, while China might raise concerns about America's own openness to trade. Chinese trade officials have recently complained that the US has failed to set a clear policy for Chinese investments in US financial institutions.

Niu Xinchun, a research fellow with the China Academy of Modern International Relations, said China was likely to be made a scapegoat, with the effects of the subprime crisis set to bite harder ahead of the presidential election, which 'would increase the difficulties for both sides to reach any concrete agreement'.

However, Mr Niu said this would make this week's talks significant because both sides were under pressure to find solutions.

'If they fail to reach agreement, it will become more difficult in the next round which will fall in the election campaign season,' Mr Niu said.

The twice-yearly talks will be held in Beijing and Washington in June and December each year.


Wu Yi Vice-Premier

A protege of Zhu Rongji, has risen up the party leadership since 1962

Helped negotiate the mainland's entry into the WTO

Built a reputation for transparency and a strong will

Likely to retire in March

The issues

Overheating economy, intellectual property rights, Sino-US trade deficit, the yuan's exchange rate

Henry Paulson Treasury Secretary

The president's leading adviser on economic issues

Before being appointed to the Treasury, was chairman and chief executive officer of Goldman Sachs

Has strong beliefs about the causes and effects of global warming

The issues

The subprime market crisis, domestic pressure over the trade gap and the safety of imported Chinese products, a sagging economy