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Robert D. Hormats, “Forty Years after the Nixon Visit: Progress, Challenges, and Opportunities in US-China Economic Relations,” March 6, 2012

Hormats is Undersecretary of State for Economic, Energy, and Agricultural Affairs. He spoke in New York at the Asia Society.
March 6, 2012

I am so pleased to join you tonight to mark a historic event – the 40th anniversary of President Richard Nixon’s visit to the People’s Republic of China.

I want to thank the Asia Society and Orville Schell for this tremendous opportunity.

Images of President Nixon meeting with Chairman Mao Zedong and Premier Zhou Enlai in 1972 are etched in the American consciousness for those who witnessed them live on TV.

As a staffer in Dr. Kissinger’s National Security Council, it was a great thrill for me to have been involved in the preparation for, and the follow-up to, that historic meeting. And it is an equally great privilege to still be working on advancing the U.S.-China economic relationship as Under Secretary of State some 40 years later.

Over this period, in my many visits to China, I have observed, and been privileged to be modestly engaged in several aspects of one of the truly great historic events of the 20th Century – the resurgence of this great society and great people.

At the time President Nixon made his visit to Beijing, the focus was primarily strategic in nature. For the U.S., it was very much part of our effort to strengthen our negotiating position vis-à-vis North Vietnam. For China, and for the U.S., it counterbalanced what was seen to be a growing Soviet military threat to China.

Hard as it may be to believe today, the opportunity to expand economic ties actually was very low on the list of priorities for either the U.S. or China.

Today, when we reflect on the many trade, financial, and business ties we have with China, it is easy to forget how difficult it was to get started.

Prior to the Nixon White House, there was no commercial relationship between the United States and the People’s Republic of China.

Tonight, I want to focus on how far the U.S.-China economic relationship has progressed since then.

And I also want to focus on some ways to advance U.S.-China economic relations over the next 40 years.

While it was primarily geopolitics and the externally driven pressures of the Cold War that helped push China and the United States together 40 years ago, many of the top subjects in the relationship today are economic.

And while 40 years ago China’s economic policies were of little or no consequence to our domestic economy – nor did our economic policies have any effect on theirs – today the situation is very different.

What we see when we look at the sweep of events over the last couple of decades is that economic power often rivals or exceeds military power as a source of influence. Indeed in the case of China, its status of a major global power has been established more by its economic influence than by is military strength – a very different situation from previous countries that became great powers.

And while the United States and China share a great many common interests – and the relationship has produced a significant number of mutual benefits – we must also candidly recognize the several areas on which our positions diverge and where we do not prioritize the same values.

To address differences, and build on common interests, our economic relations over the next 40 years may well have to be framed differently in important respects than in the past 40 years.

The U.S. must continue to strongly assert our core economic positions in such areas as intellectual property rights, trade secrets protection and the necessity of a level playing field and non-discrimination in trade, innovation and investment.

But in so doing, we will probably achieve most progress in these and other areas if we frame our positions where possible in ways that dovetail, and are consistent with, the objectives China has set for itself. And attempt to make common cause with those in China who seek bolder reforms of the type we also advocate in their nation's own interests.

One aim should be to encourage provinces and cities that want to distinguish themselves by creating better living standards and more jobs for their people to compete with one another to adopt world class standards on intellectual property and treatment of investment.

The 12th Five Year Plan includes some policy measures that would benefit China and the United States as well.

For example, as was announced during the recent visit of Vice President Xi Jinping, China will intensify its structural tax reduction policies, including making adjustments in import tariffs to increase consumption, accelerate development of the services sector, and actively expand imports

Another example is that China already is acting in some ways to improve its intellectual property rights protection.

I also was encouraged by China’s decision to establish a State Council-level leadership structure, led by Vice Premier Wang Qishan, to lead and coordinate IPR enforcement, as well as by President Hu Jintao’s remarks at the APEC CEO Summit in November when he said China would “step up protection of intellectual property rights and make China a country driven by innovation.”

We also need to underscore that many of the changes we are asking of China are not simply bilateral issues. They are in the interest of large numbers of other nations, including many of China's Asian neighbors and its BRICS colleagues.

Hence, we will need to work with these emerging countries, as well as supporters of the global economic system in Europe, Latin America, the Middle East and Africa, to strengthen and broaden adherence to the global rules in areas such as trade, intellectual property, investment, raw materials, and open sea lanes. The broader and deeper the global support for such rules, the more comprehensive and compelling the argument for China to subscribe.

I. Little Early Interest in U.S.-China Trade

To begin, we need to look back to the U.S.-China relationship in 1970 and 1971.

Prior to President Nixon’s visit, there was little appetite in either China or the United States to even discuss the bilateral economic relationship.

Chinese Ambassador Xiong Xianghui once told two of my NSC colleagues, John Holdridge and Dick Solomon that China had “no interest” in trade relations with the outside world, including the United States.

And even when there was genuine interest, there were a host of very practical difficulties to opening U.S.-China trade, including existing U.S. restrictions on doing business with China.

Prior to the visit, the Nixon Administration undertook a number of practical steps to signal to China our desire for closer trade relations, principally to improve political ties.

  • In April 1971, President Nixon announced a five-point program to relax trade and travel restrictions, including a pledge to expedite the issuance of visas to PRC nationals wishing to visit the United States, a relaxation of currency controls to allow China to use American dollars, and the removal of restrictions prohibiting American oil companies from providing fuel to Chinese merchant ships.
  • In June 1971, President Nixon lifted a 21-year-old embargo against trade with China to allow selected exports to China and the import of goods from China. He also terminated the requirement that half of the shipment of grain and flour to Communist nations must be carried in American ships.

When Nixon visited China in February 1972, however, there still was little focus on economic relations.

In the middle of the Shanghai Communique, there were only two sentences on economic issues:

“Both sides view bilateral trade as another area from which mutual benefit can be derived, and agreed that economic relations based on equality and mutual benefit are in the interest of the peoples of the two countries. They agree to facilitate the progressive development of trade between their two countries.”

Whether because of lack of attention due to their understandable subservience to strategic issues or because of the practical difficulties that had to be overcome, our economic policies towards China at the time were relatively modest.

One of our earliest measures was to allow American travelers to bring back to the U.S. $100 in Chinese goods – but only if they were not purchased in China (e.g., were bought in Hong Kong). It also proved enormously complicated to unravel the myriad US export control regulations and other restrictions that had begun during the Korean War and accumulated over decades.

II. Slow But Steady Post-Visit Progress

Soon after the visit, the NSC staff began to explore further expanding these fledgling economic ties.

My colleague on the NSC staff, the late John Holdridge, and I produced a memorandum on recommendations for a working group on trade issues.

Cautioning against getting caught up in unrealistic excitement over the China market, we recommended a series of actions the two sides could take in order to gradually reduce obstacles to trade.

We outlined a set of economic issues that would have to be dealt with, including:

  1. the resolution of outstanding claims by U.S. citizens against China, and by Chinese citizens on assets frozen in the United States,
  2. the question of “Most Favored Nation Status,”
  3. travel between the two countries,
  4. industrial and intellectual property protections, and
  5. the expansion of mutual knowledge of what each country had to offer the other.

In early 1973, I was asked by Dr. Kissinger to get the private sector – which to date had had virtually no contact with China – more engaged. Commerce Secretary Fred Dent and I worked with the business community to establish the “National Council for United States-China Trade.”

That organization changed its name in 1988 to the U.S.-China Business Council. It now has offices in Washington, Beijing, and Shanghai, and represents approximately 240 companies.

By the end of the decade, President Carter’s decision to normalize diplomatic relations with China, as well as Deng Xiaoping’s decision to push for domestic economic reforms, and his “kai fang” strategy of opening China to the world, worked in concert to produce a rapid increase in trade.

III. Period of Rapid Growth in Economic Ties

As everyone in this audience knows, the pace of progress since 1980 has been dramatic.

China’s economic reforms in the 1980s opened its market to foreign investment, allowed entrepreneurs to establish private businesses, launched agricultural reforms, lifted price controls, and closed many state-owned companies.

At the same time, Deng Xiaoping and President Carter also laid the groundwork for promoting people-to-people exchanges.

Deng fully recognized the impact such exchanges would have on the pace of reform. I can recall one conversation with him in China in which, with great conviction, he stated, “Just wait – we have 10,000 students abroad – when they come home, they’ll change China.”

It was a radical move at the time to allow so many Chinese to study in the West, particularly in the U.S., but the policy paid enormous dividends.

Later, under Premier Zhu Rongji’s leadership, China enacted another set of economic reforms in an effort to qualify to join the World Trade Organization (WTO), ultimately acceding in 2001.

It’s important to highlight here that both Deng and Zhu understood that China would derive enormous benefits from being a full participant in the international economic system. And they deftly used the pressure and leverage of global rules and norms to accelerate market-oriented change in China.

IV. The Dramatic Numbers

The economic changes since the 1972 Nixon visit, as well the progress in the U.S.-China economic relationship, have been nothing short of breathtaking:

  • In 1972, U.S.-China two-way trade in goods was a mere $95.9 million. By 1985 – just a few years after Deng’s reform and opening – this volume had increased more than 70-fold to $7 billion.
  • In the 25 years between 1985 and 2010, two-way trade in goods increased from $7 billion to $365 billion.
  • And U.S. goods exports to China reached $103.9 billion in 2011 –a more than a 25-fold increase, from the $3.9 billion of exports to China in 1985.

To give you an illustration of how far we’ve come, before 1971-72, U.S. exports of aircraft and locomotives to China were prohibited. But during President Hu Jintao’s visit to Washington in January 2011, we were able to announce deals for Boeing to sell 200 aircraft to China for an estimated $19 billion and GE Transportation to sign a $1.4 billion contract with China’s Ministry of Railways, including $350 million for export of locomotives, sub-assembly, services support, and signaling systems.

But despite breathtaking progress, the U.S. and China still have many obstacles to overcome.

And therefore, I believe this 40th anniversary of the Nixon visit allows us not only to reflect on the past but also to contemplate how we can move forward based on lessons learned from it.

V. A New Opportunity for Reform and Opening?

Looking ahead to the next 40 years, we have an opportunity to shape the future global economic system for the benefit of both our countries and the world.

And I should add here that it is not only our relationship with China that will shape the global economy in the years to come but also our growing engagement with Asia as a whole through APEC and our ties with ASEAN, Japan, South Korea, and the Trans Pacific Partnership.

Our goal in each case is to strengthen mutual commitments to the global system of market oriented rules, practices and norms that are open, free, transparent, and fair.

By reinforcing and strengthening high-standard global practices, we also discourage more nationalistic domestic standards, regulations, and restrictions that some countries – China among them – too often see as an attractive model for their economies.

When we look more closely at what is going on inside China, I would offer that – just as was highlighted by the World Bank in its “China 2030” report released last week – China will need to pursue a new round of reforms to continue to transform its economy.

What served to enable dramatic improvements over the last 40 years – producing a spectacular rise in the living standards of hundreds of millions of people and in China's overall economic growth – may not be the kinds of policies or practices that will do so over the next forty.

Chinese leaders of the past recognized that institutionalizing internal reforms to better comply with the main requirements of international institutions was in their interest. China today needs to recognize that it has a similar interest in further adjusting its domestic practices to conform with both the letter and spirit of the current global system, rather than attempting to carve out exceptions or to take advantage of gray areas by engaging in practices that are inconsistent with global norms and rules, even if they are not technically WTO illegal, when it serves China’s short-term goals.

More than most countries, China should see the long-term benefits of reforms that recognize – as Zhu and Deng did – that adapting internally to many of the elements of the market-oriented, rules-based international system can be good for growth and economic vitality in China.

Initiatives to encourage Beijing to play a full-throated, constructive role in the global system will be most effective when they are framed in a way that clearly relates to China's own interests. One example is the highly positive role China played in the G-20 in managing the recent international financial crisis.

The most astute U.S. approach would be to anticipate (rather than resist) China becoming richer and more powerful – and encourage it to recognize that adhering to global rules and norms is not incompatible with this process but in fact will enhance it and ensure its sustainability.

This applies not only to economic policy but also to environmental policy. China’s skyrocketing demand for water and other natural resources, and its adverse impact on the country’s environment, are damaging the health and well-being of its own people and the global environment; and its voracious appetite for energy and other raw materials risks leading to destructive international competition for resources.

Better income distribution, less reliance on exports, greater efficiency in the use of natural resources, real competition that is not state-driven, non-discrimination in government procurement and investment policies, and a more efficient allocation of capital can all strengthen and sustain prosperity for greater numbers of Chinese and reduce economic tensions and imbalances with the rest of the world.

Framing our narrative in this context has considerable appeal to many Chinese.

While the broad Chinese model is conventionally termed “state capitalism,” because so much economic power is in the hands of state-owned and supported industry – and these sectors receive so much financial and other support – this is not the whole picture.

There are, in China, significant pockets of intense private sector competition, home-grown innovation and technical advances that do not depend on government support, and substantial numbers of people who would benefit from, and believe China would benefit from, all of the significant policy reforms I have just mentioned. We should engage with all of them, in addition to the national government.

VI. Policies for the Future

As I stated at the outset, whereas 40 years ago, geopolitics and the external environment pushed us together, many of the compelling priorities for the United States and China today are internal in nature – jobs, growth, the environment, social equity. We must find ways to ensure that U.S.-China relations support these internal objectives in both countries– and that one side does not seek to accomplish them at the others’ expense.

If we work together and avoid seeing our relationship as a zero-sum game, then mutual success is possible. If we do not, then success in each of our economies will be far more difficult.

There are a number of ways to advance U.S. economic relations with China, strengthen the American economy, and help China accomplish its own goals on domestic economic reform as well.

A few examples:

  • Increasing Chinese investment in the United States would help balance our economies, contribute to domestic jobs and growth here, and support China’s more outward orientation. We need to encourage Chinese investment in the United States, and we’re doing so through Select USA, the U.S.-China Governors Forum.

    But we also need to be sure that Chinese companies do not compete here or elsewhere using pirated intellectual property or by taking unfair advantage, utilizing subsidies and other government support they receive at home. Lifting restrictions on foreign investment in key sectors in China would also improve receptivity in the U.S. and in other nations. And throughout the world, Chinese investment will be more secure if it respects local cultures, as well as sound environmental practice, and promotes transparency as well as accountability. On this as on other issues, we should make common cause with other countries.

  • Ramping up agricultural trade would lead to more U.S. exports and help China meets its food security needs. The U.S.-China Agricultural Symposium that was held in Iowa during Vice President Xi’s visit is an encouraging sign of progress in this area.
  • Engaging China in the WTO and other multilateral institutions will remain critically important. China’s accession to the WTO has been good for China and for the world – but just as China insists that others abide by WTO rules, so should Beijing. More broadly, it will improve relations with many nations and the trade opportunities for its own companies if it avoids practices that – as I mentioned earlier – may not be strictly illegal under the WTO, but which are inconsistent with the organization’s principle of fairness and non-discrimination.
  •  Encouraging “competitive neutrality” with respect to state-owned and state-supported enterprises will aid China’s own rebalancing efforts. We don’t argue with China’s desire to have SOEs, but often massive government support of these entities grossly distorts international and domestic competition. That ultimately harms not only foreign investors and exporters but many Chinese firms as well. As China seeks to boost the prospects of job creation in its private sector and especially in small and medium sized Chinese enterprises, such tactics are doubly harmful.
  • Insisting that China maintain an environment for innovation that respects intellectual property rights and trade secrets – and is non-discriminatory. This will benefit Chinese innovators and American companies as well. It will also allow closer collaboration and greater trust between Chinese and many foreign companies. If China expects – and it should – its growing body of intellectual property to be protected around the world, it must protect foreign intellectual property in China, not only at the national level but in the provinces and among SOEs as well.
  • Because large amounts of U.S. food, drug, and other U.S. imports come from China, cooperation in product safety can promote the health of citizens in both our countries. We have made excellent progress through the FDA and other agencies. And we have major multilateral efforts underway through institutions such as APEC. But we need to do more together and China needs to do more to enhance its reputation as a safe supplier.
  • Collaborating on the environment, clean water and climate change by fostering exchanges of scientists and policymakers can combat environmental degradation in China, as well as global climate change. It will also help China to address the problems of social instability and ill health that its enormous reliance on coal and other major CO2 emitters produce. (The GE Ecoimagination program – for which I attended the Southwest China launch in Chengdu last fall – is a great example of clean energy collaboration with the private sector.)
  • Bringing together Chinese and American governors, provincial and municipal leaders to collaborate on economic, energy, and environmental issues – and boost commercial opportunities – can provide a series of mutual benefits, including boosting American exports to China and encouraging Chinese investment in the U.S.

VII. Conclusion

Since President Nixon’s historic visit to China, there has been bipartisan support for closer U.S.-China relations – despite a series of ups and downs in the relationship. It is important that regardless of what differences arise, that tradition be maintained.

It is also important to recognize that however much China changes in the directions the U.S. wants, and however well we continue our efforts to forge mutually beneficial economic ties in the years ahead, the key to a strong American economy lies in our own hands.

The more dynamic, innovative and resilient the American private sector – and the greater the capacity of our political system to address the fiscal, infrastructure, educational and energy needs of the country – the more successful will be the U.S. response to China's competitive challenge. And the more credible the U.S. economic model will be other nations. We will also be more credible in obtaining support in China and elsewhere in the world for the kind of market-oriented, rules-based system we led the way in constructing.

Much of the future of the world in the 21st Century will depend on how well China and the U.S. sustain growth in their own economies, manage their relationship with one another, and together address challenges facing the global economy. If we can successfully strengthen this evermore complex and important relationship, and capitalize on the opportunities it presents while narrowing our differences, both countries will be better for it, just as they were following the Nixon visit 40 years ago.