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Paulson Remarks on Fourth Meeting of the U.S.-China Strategic Economic Dialogue, June 10, 2008.

June 10, 2008

Paulson Remarks on Fourth Meeting of the U.S.-China Strategic Economic Dialogue

June 10, 2008

Remarks by Secretary Henry M. Paulson, Jr. On the Fourth Meeting of the U.S.-China Strategic Economic Dialogue at the Carnegie Endowment for International Peace

Washington - Thank you Jessica, and thank you to the Carnegie Endowment for International Peace for the opportunity to speak with you.

Today, as has been the case each day since the Sichuan earthquake, our thoughts and prayers are with the Chinese people as they work to meet the challenges resulting from this terrible tragedy. As President Bush has said, the United States stands ready to help in any way possible. Our government, companies, charities and individuals have already donated or pledged over $100 million in goods, services and money. We are committed to help China rebuild the devastated area.

The U.S. – China economic relationship is complex, broad and important to both our countries and to the world economy. Through the on-going, dynamic and respectful discussions of our Strategic Economic Dialogue, the SED, the relationship is also growing in a positive direction.

A Preview of the Fourth Strategic Economic Dialogue

I look forward to making further progress on shared objectives at the fourth meeting of the SED next week. This meeting will be the first opportunity for my Cabinet colleagues to collectively meet and work with China's newly appointed leadership team. We welcome our new Chinese colleagues and together we will demonstrate that the SED can effectively manage our economic relationship through a period of leadership transition while laying a course of concrete action to achieve our strategic objectives. In particular, I look forward to welcoming my new counterpart, Vice Premier Wang Qishan, in his new role for his country.

A critical goal for the 21st century is to get the U.S.-China economic relationship "right." At next week's SED we will have a robust discussion of our economic relationship, envisioning a future of sustainable economic growth over the next decade.

And so the SED meeting next week will focus on five areas. These are: managing financial and macroeconomic cycles; developing human capital; the benefits of trade and open markets; enhancing investment; and advancing joint opportunities for cooperation in energy and the environment.

The SED has brought progress faster and more broadly on issues important to the U.S. and global economy than would have been possible otherwise. Success has come through on-going collaboration, candid high-level discussions, understanding each other's priorities and interests, and surmounting particular bureaucratic interests by working with the Chinese government as a whole.

It is clear that our strategy for robust engagement with China – intensive dialogue but with resort to WTO dispute settlement and WTO-sanctioned trade remedies if needed – is more productive than protectionist policies or legislation.

Managing financial and macroeconomic cycles will be our first discussion topic next week. Both the United States and the Chinese economies face current challenges, including adjusting to higher energy and food prices. The United States is working through a housing market correction and re-pricing of risk in credit markets.

China is grappling with rising inflation and growing internal and external macroeconomic imbalances. China's imbalances stem largely from an economic structure that has become too heavily dependent on industry, investment and exports. This has led to a growing trade surplus, high energy use, environmental degradation and rising domestic inequality.

Continued exchange rate reform is among the macroeconomic and structural measures China should take. Exchange rate reform will be critical in meeting China's short and medium-term challenges. Greater exchange rate flexibility will make Chinese monetary policy more effective in controlling inflation and will help bring about the structural economic shifts China needs to reduce its imbalances. Despite the progress that China has made, including almost 20 percent RMB appreciation against the dollar since July 2005, continued movement and greater flexibility are still needed. Increasing the pace of reform of China's financial services markets is also important to further support the growth and development of China's economy.

A major contributor to the structural imbalances is a saving rate challenge in each of our economies. In the United States our saving rate is too low. In China it is too high. In order to effectively deal with this issue, we must address how to adequately provide for our aging populations, including the role of private and public insurance and financing for social services such as health care and retirement. Inadequate social safety nets in China lead to high levels of precautionary saving and are a major contributor to low domestic consumption and the large and rising trade surplus.

In the United States rising health care costs and our aging population are creating public policy challenges. Restraining the growth of health care costs and reforming our Medicare and Social Security programs are critical to prevent a looming fiscal problem. These steps are necessary and important measures to help us address our low saving rate and the resulting imbalances.

Increased openness to competition and international trade is critical for continued economic growth in both our nations and for the future prosperity of our people. We will discuss steps that we can take to ensure that our countries, and the world economy, remain open to trade.

We will examine how we can promote mutual interests, including enhancing innovation and developing and protecting intellectual property intensive industries, improving food and product quality and safety, stopping the global trade in fake products, furthering transparency and rule of law, and supporting green energy and environmental product markets.

We will build on previous progress, such as the civil aviation agreement that resulted in a new non-stop flight between Atlanta and Shanghai this past March, and a new group leisure travel agreement that is estimated to bring up to 100 million Chinese travelers to the United States over the next 15 years, creating jobs and growth here at home.

America's policy of open investment is one of our predominant economic strengths. Foreign direct investment stimulates competitiveness, growth, jobs and productivity. At the fourth round of the SED, we will discuss the best way to promote and protect bilateral investment and counter protectionist pressures. We will also discuss the concerns of American companies that China's investment regulations are opaque and seem in many ways to be designed to favor China's "national champions."

The value of the SED to economic issues is clear. The SED also increases U.S. – China collaboration on security and other key international issues, making our overall relationship stronger and broader.

Energy Security and Environmental Sustainability

Finally, next week we will also focus on energy security and environmental sustainability. I will elaborate further on that today.

Energy Security

The U.S. economy faces significant headwinds from a number of factors including rising energy prices. Gasoline, food, and many common household items have become more expensive for American families. There is an urgent need for U.S. energy policies to significantly evolve to ensure U.S. energy security.

Since the beginning of the Bush Administration, the United States has spent nearly $18 billion to research, develop, promote and bring clean and efficient technologies to market. We continue to develop new strategies – last December President Bush signed the Energy Independence and Security Act, which responded to his "Twenty in Ten" challenge to improve vehicle fuel economy and increase alternative fuels. But much more is needed if we are to adequately address our energy security challenges.

As the two largest net importers of oil, China and the United States face similar challenges. We have a strong and shared interest in avoiding supply disruptions, increasing energy efficiency, promoting the efficiency and transparency of the global energy markets to the benefit of all oil importing nations, and expanding the availability and use of alternative energy sources.

To power its economic growth China has become the world's largest coal producer and consumer. In 2006, it became the second largest purchaser of new vehicles, which is one of the key reasons why China has now become the world's third largest consumer of oil.

To find solutions to these shared challenges, the U.S. and China have been working together under the SED to address energy security. We already have an agreement to strengthen cooperation on next generation biofuels, to increase industrial energy efficiency, strengthen cooperation on the certification of energy efficient products, increase cooperation on nuclear safety, and a joint five-year commitment to promote large scale deployment of alternative fuel technologies for vehicles. In conjunction with the International Energy Agency, the IEA, we have also strengthened cooperation on strategic oil reserves.

But to comprehensively address its energy security, China must go beyond these joint efforts. China has made a good start by establishing numerous plans and ambitious goals, highlighted by the Eleventh Five Year Plan, for 2006 to 2010, which established aggressive goals to reduce energy consumption per unit of GDP by 20 percent. China has moved towards meeting some of these goals by reducing energy consumption over 3 percent per unit of GDP output in 2007. While I applaud this continued focus and am encouraged by this progress, further results cannot come fast enough.

The Role of Markets in Promoting Energy Security

As the United States developed, we found that harnessing market forces, combined with strong regulations and enforcement, were powerful tools to support economic growth.

For example, the sulfur dioxide tradable credit system established under the 1990 Clean Air Act has demonstrated how market-driven measures can cost-effectively reduce pollution.

We also learned a costly lesson in the 1970's when we attempted to defy market forces and imposed oil price restrictions. Rather than achieving our intended result, we experienced winter heating oil shortages, supply problems, rationing, and a reduction in domestic oil and gas investment and exploration. In some cases we attempted to control output prices without being able to control input prices, forcing operating losses and large cuts in supply.

China, by setting price controls on fuel, is facing similar consequences today – as can be seen by persistent gasoline and diesel shortages throughout the country. The consequences of these policies also extend to the power sector, where price caps on electricity and fuel contributed to nationwide power outages during snowstorms this past January and February.

The United States learned that price controls interfere with the natural equilibrium of markets to match supply and demand, and lead to shortages. And because market forces can never be completely eliminated, price controls often lead to smuggling and corruption.

Indeed, the best way to deal with economic shocks is to allow markets to operate fully, and with full information. For oil, information on stocks and reserves is particularly important, and therefore it is critical that China and all oil producing countries provide information on their reserves to the IEA.

In the United States, innovation, coupled with market-based policies and regulations that encourage energy efficiency, lead to technological advances that reduce energy consumption. As a result, the consumer benefits and markets evolve and grow. We also achieve a cleaner environment.

The Ten-Year Energy and Environment Cooperation Framework

The U.S. and China both know that tomorrow's economic opportunity requires conserving natural resources today. To focus more sharply on this goal, at last December's SED meeting we announced the beginning of ten years of cooperation on energy and environmental issues.

Working together on this framework will challenge all levels of government, industry, academia and non-governmental organizations to find answers to these and many other questions: How do we reduce dependency on oil and increase energy security? How do we better preserve the natural environment, and prevent greenhouse gas release due to deforestation? How do we meet our energy goals? How do we ensure that our water is clean and safe?

These questions may be answered differently in the United States than in China. Yet, our approaches to finding answers may be similar – to implement proven policies, to educate individuals to make environmentally sound decisions, and to ensure that companies follow regulations designed to protect human health.

Solutions will also require technological breakthroughs and making existing and new technology affordable by reducing market access barriers. I often hear from U.S. companies that they do not sell their technology to willing Chinese buyers for fear that their designs and technology will be stolen. These U.S. exporters' concerns are a significant reason for limited sales of technology-based products. I hear from Chinese government officials that the U.S. technology they need for pollution control is expensive in part due to tariffs and non-tariff barriers. We have a shared interest in resolving these dilemmas, and we can solve them.

Since December, we have been adding details to this framework and we will announce the results of our initial efforts at next week's SED meeting. This cooperation will likely bring innovations that we cannot yet imagine and expand our relationship in many new ways.

We are selecting shared goals, such as reducing dependency on oil. We are defining specific energy targets, such as increasing vehicle fleet fuel efficiency and creating incentives for the development and use of alternative fuels. We are developing action plans for joint projects that will accelerate existing efforts. These action plans will help each country identify policy solutions to improve implementation of existing regulations and incentives, and challenge us to develop even more innovative approaches and answers.

The Environmental Challenges

China's leaders go about this in the face of daunting environmental challenges. According to the World Bank, 16 of the world's 20 most polluted cities are in China. Water quality is deteriorating – 90 percent of all rivers show signs of significant pollution, and 62 percent of water is unsuitable for fish. And although the Chinese government has established laudable environmental protection goals, monitoring and enforcement of environmental regulations remains very weak.

Conservation is one area where both the United States and China have made significant progress in safeguarding the environment. In the United States, through a variety of federal, state and local agencies we conserve, protect and manage natural resources. Private industry and a vibrant non-profit sector further support these efforts.

I applaud China's recent steps and would encourage further progress to develop legislation that would more effectively protect natural habitat. I am also encouraged to know that China is adding 2 million hectares of forest per year to increase forest coverage by 6 percent to combat desertification. According to official Chinese projections, by 2010, 16 percent of China's total territory will be natural reserve areas, and 90 percent of the remaining typical forest and wetland ecosystems, and key national wildlife will effectively be protected.

A Foundation for Progress

The environmental aspects of the ten year framework build upon a solid foundation. We have a memorandum of understanding to combat illegal logging and promote sustainable forest management. And we have launched efforts to help China develop a nationwide program on sulfur dioxide emissions trading. U.S. and Chinese private sector companies are also helping to create the "green" economy. Whether it is the public sector or the private sector, this work is aspirational.

Recent meetings between U.S. and Chinese leaders have shown great promise for collaboration on green buildings, energy efficient infrastructure projects and creating "Eco-cities." China adds 2 billion square meters of new construction every year, and has 40 billion square meters of existing buildings that need retrofitting. China's leaders know that the development of green buildings is a critical need.

As we establish this cooperative framework, my friends in China often ask what can be done about China's immediate energy and environmental challenges. My answer is that China, given its current economic growth and prosperity, can leapfrog the United States and the rest of the world in deploying and using advanced energy and environmental technology.

Adopting advanced technology will increase China's energy efficiency and reduce the emissions of greenhouse gases and harmful pollutants. But bringing this technology to China is hindered by the tariff and non-tariff barriers that China places on environmental goods and services. A high priority should be eliminating barriers on products, goods and services that can improve the health and welfare of the Chinese people.

For example, there is a water membrane technology available right now. If installed properly, it could help local communities take significant steps towards reducing the pollution entering rivers from power plants. That means that within months, some Chinese citizens could have cleaner water. Yet a tariff of 22 percent on water membranes makes this technology too expensive for many communities.

Significant opportunity exists for the United States and China to achieve immediate progress and make long-term strides towards energy security and environmental sustainability. Through a ten year framework of cooperation, I believe that we have the foundation to meet these challenges in a sustained, collaborative manner.


Next week's fourth Strategic Economic Dialogue meeting will move the United States and China even further forward to a stronger economic future. We have kept our economic relationship on an even keel, even during times of stress. We are building upon a shared vision that is possible because of our cooperation, and feasible because of our commitment to the prosperity of our people. Thank you.