Now's not the time to end US-China economic dialogue

Powerful US House Democrats have expressed their scepticism with the latest round of the US-China Strategic Economic Dialogue, which ended last week. Congressional critics of US-China economic policy complain that little progress has been made on substantive issues such as 'currency manipulation' since the dialogue began, in 2006. Some would even go so far as to end the dialogue altogether.

That would be a mistake. As the head of China's delegation, Vice-Premier Wang Qishan noted, in his opening remarks in Annapolis, that the dialogue is worthwhile as a means of preventing the politicisation of trade and investment decisions. By taking a long-term view, the dialogue helps circumvent the China-bashing frequently seen in US congressional hearings.

The latest round of talks did open the door for a bilateral investment treaty that could help end discriminatory treatment of foreign direct investment in both countries. There's little chance, however, that the Bush administration could successfully reach a conclusion with China before the end of the year, and with animus towards China increasing on Capitol Hill, the US Senate is unlikely to ratify it this year, and even less likely to do so next year. That's a shame, because a well-crafted treaty would help China move more quickly towards financial liberalisation.

A bilateral investment treaty would allow US firms investing in China to settle disputes via international arbitration rather than subject themselves to the arbitrary rule of law that currently exists in domestic Chinese courts. In turn, China would have an incentive to improve its legal system and to better protect private property rights.

Meanwhile, the US could expect greater inflows of Chinese investment funds if the rules of the game were clear.

Treasury Secretary Henry Paulson and others do not want to lose the opportunity to attract massive amounts of new foreign direct investment from China, and they'd like to provide greater access to Chinese markets for US firms. So the Bush administration has good reason to want to negotiate a bilateral investment treaty with Beijing.

The US should avoid making Chinese reformers lose face by demanding unrealistic concessions. China will move at its own pace and, for 30 years, it's been making impressive progress towards a market economy.

As UBS economist Jonathan Anderson wrote recently: 'Although state ownership is widespread, the Chinese authorities are surprisingly (and increasingly) laissez-faire when it comes to actually managing the economy. In almost every category, market forces are winning out.'

The US Congress cannot change China's institutions overnight. Demanding that China transform according to US preferences is certain to antagonise the Chinese people. America should unilaterally offer China some carrots consistent with the avowed goal of 'peaceful development'. As a start, the US should commit to continuing the Strategic Economic Dialogue, and end China's designation as a 'non-market economy' for purposes of deciding antidumping cases.

Finally, the US should welcome China, as the world's third-largest trading nation and soon to be third-largest economy, into the Group of Eight. Beijing's recent agreement to co-operate with Japan in developing natural-gas fields in the East China Sea and its improved relations with Taiwan support the case for integrating Beijing more thoroughly into the global economy.

By giving China greater recognition without asking for anything in return, the US would send a strong signal that it is not opposed to China's peaceful rise and prosperity. Washington would also affirm its confidence in a policy of engagement and its distrust for protectionism. Chinese reformers would benefit and gain a stronger hand. That would be good for China and for the world.

James A. Dorn is a China specialist at the Cato Institute in Washington and editor of the Cato Journal