Asia-Pacific, Economy & Trade, Headlines, North America

ECONOMY: Political Uncertainty Dogs U.S., China Dialogue

Abid Aslam

WASHINGTON, Jun 16 2008 (IPS) - Top U.S. and Chinese policy makers hold two days of economic talks this week amid uncertainty about the future of U.S. policy on trade, investment, and China.

U.S. Treasury Secretary Henry Paulson is to host the fourth cabinet-level meeting of the Strategic Economic Dialogue, an initiative he conceived to keep a lid on tensions between the competing giants and between the White House and a legislature bent on targeting China, long a lightning rod for popular misgivings about free trade.

Washington also intended the dialogue, launched by Presidents George W. Bush and Hu Jintao in 2006, to open a new front in U.S. efforts to pry open China’s consumer market and financial sector.

Two years later, the Bush administration has succeeded in winning some concessions from Beijing and in containing anti-China sentiment in Congress.

“It is clear that our strategy for robust engagement with China – intensive dialogue but with resort to World Trade Organisation dispute settlement and WTO-sanctioned trade remedies if needed – is more productive than protectionist policies or legislation,” Paulson said ahead of the talks scheduled for Tuesday and Wednesday at the U.S. Naval Academy in Annapolis, east of here.

The Bush administration is to be replaced in January 2009. In consequence, China’s representatives and U.S. market players alike have said they are looking beyond Bush for signs of what future course Washington might set. Indeed, at this week’s talks, China will field a new delegation with Vice Premier Wang Qishan, a former banker, at its head.

Officials and analysts alike expect no major political breakthroughs at Annapolis. Nevertheless, both sides will be eager to show results and prevent protectionist backsliding at home. Plans call for the signing of an updated 10-year “framework” for cooperation on energy and environmental issues. The United States is the world’s largest, and China its fastest-growing, consumer of energy.

Separately, officials on Monday announced the clinching of 35 business deals worth some 8 billion dollars – a largely symbolic figure. These involve U.S. firms including General Motors, Texas Instruments, Cisco, Ford, IBM, Oracle, and Motorola. Chinese firms included China Mobile.

A Chinese trade and investment mission involving 120 companies “will be signing more than 70 buy-from-the-U.S. contracts and agreements to invest in the U.S. that are worth 13.6 billion dollars,” said a Chinese government statement. The partnerships were forged outside the official dialogue process but were consistent with the initiative’s aim of spurring economic and job growth, officials said.

Bush’s likely replacements include Republican John McCain and Democrat Barack Obama. Whether either would continue the existing dialogue process remains to be seen.

Both candidates have spoken of a need to work with China on environmental issues but Obama, whose party enjoys considerable support from labour unions, has blamed Beijing for siphoning U.S. jobs through unfair trade practices. Critics of current trade arrangements say they have led to the loss of more than 3 million U.S. manufacturing jobs since 2001.

Obama also has said he would support legislation to castigate China for suppressing the value of its currency.

The next U.S. president likely will face popular and congressional pressure to turn up the heat on the Chinese until they lift the yuan, also known as the Renminbi. Many here say the Chinese have kept the currency artificially low to help boost their exports.

The U.S. trade deficit with China topped a record 256 billion dollars last year. The trade gap with China now accounts for one-third of the overall U.S. trade deficit, according to the Commerce Department.

Chinese officials have countered that they are committed to gradually allowing the market to play an increasing role in determining the exchange rate. The yuan, they add, has risen 20 percent against the dollar since Beijing removed its peg in July 2005.

As a consequence, the U.S. has begun to export goods to China faster than it imports them from its number-three export market and the trade deficit has begun to shrink.

Additionally, Chinese officials have said they would bring to Annapolis their concern that the dollar has been allowed to weaken in order to increase U.S. exports and must be boosted. Although a stronger dollar would narrow China’s trade surplus with the United States, it would buttress China’s foreign reserves, which are heavily dollar-denominated.

At this week’s talks, the sides also are likely to swap complaints about each other’s resistance to foreign investment.

Paulson, who has headed the U.S. delegation at the twice-yearly dialogue from the outset, said he would convey “the concerns of American companies that China’s investment regulations are opaque and seem in many ways to be designed to favour China’s national champions” or corporate majors.

In particular, U.S. officials want China to open its financial sector to foreign banks and investment houses, including major U.S. institutions.

Beijing’s representatives have said they agreed last year to allow foreign firms to issue yuan-denominated stocks and bonds but are reluctant to liberalise too quickly in light of the massive losses that have hit the U.S. economy as a result of the credit crunch originating in the U.S. mortgage and securities markets.

Conversely, officials in Beijing have pressed concerns over U.S. resistance to mergers and acquisitions involving Chinese firms and to investments through that country’s sovereign wealth fund. The concerns persist despite Monday’s business deals as U.S. policymakers weigh new limits on foreign investment.