Robert D. Hormats, East Asia and the Pacific: "The Future of U.S.-China Economic Relations," December 6th, 2012

 Remarks

Thank you, Jason, for that kind introduction.

It’s a special privilege to be here at the Hopkins Nanjing Center, which has played such an important role in promoting mutual understanding between the United States and China. And there’s no better time to be here than just three weeks after Communist Party Chairman Xi Jinping stated in his first speech that: “China needs to learn more about the world, and the world also needs to learn more about China. I hope you will continue to make efforts and contributions to deepening the mutual understanding between China and the countries of the world.”

Chairman Xi’s message is directed squarely at those of you in this room – the future leaders of the United States and China who will contribute to enhancing mutual understanding in the future. And it is not unlike the message my generation responded to when President Nixon in his historic visit to China 40 years ago upheld “the hope that each of us has to build a new world order in which nations and peoples with different systems and different values can live together in peace, respecting one another while disagreeing with one another, letting history rather than the battlefield be the judge of their different ideas.”

As some of you know, I served on Henry Kissinger’s National Security Council staff during that period, and I have worked over the past 40 years in government service and the private sector to try to promote enhanced U.S.-China economic relations. And I now see our two countries on the verge of a new era in our bilateral economic relationship – one when we can explore new possibilities for “mutual benefit” and “win-win cooperation.”

At the same point, however, there are significant challenges that will need to be overcome in the U.S.-China economic relationship. And it will be up to all of you in this audience to navigate sometimes difficult waters in order to ensure shared prosperity over the next 40 years.

I want to share a few thoughts with you today about the current state of the bilateral economic relationship, as well as some views on the opportunities and challenges ahead.

Progress in U.S.-China Economic Relations

China’s stunning economic growth over the past three decades has lifted hundreds of millions of Chinese out of poverty and thrust China into global markets as the second-largest economy and world’s leading exporter. China’s foreign trade has grown over six-fold since joining the WTO in 2001, due in large part to its “Going Out” strategy, which was launched in 1999 to encourage investment abroad. The United States welcomes a strong, prosperous, and successful China that plays a key role in world affairs and adheres to international standards. And we are counting on China’s leadership to help meet the many challenges confronting the global economy. It is worth noting that when President Nixon first visited China forty years ago, the U.S.-China economic relationship was nonexistent. 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.

In 2011, the United States imported $399 billion in goods from China and exported $103 billion to China – a nearly four-fold increase in imports and a five-fold increase in exports in the 10 years since China joined the WTO in 2001. And while the United States and China share many common interests – and the relationship has produced a number of mutual benefits – we must also recognize the several areas on which our positions diverge and where we do not prioritize the same values. What drove growth in China over the past 40 years is not likely to drive it over the next 40 years, so to address differences, and build on common interests, our economic relations over the next 40 years may need to be framed differently than in the past 40 years. Importantly, we must identify areas where U.S. interests and China’s interests converge.

Opportunities for Future Collaboration

I believe there are many possible areas for future U.S.-China collaboration that are “win-win” in nature. And, given that you are students, you may be interested to consider that many of these opportunities are in the area of science and technology cooperation. In fact, looking back, one of our most significant bilateral success stories is the U.S.-China Science and Technology Agreement, which was launched in 1979 by Deng Xiaoping and President Carter and began an era of robust government-to-government S&T cooperation.

And looking ahead, we can see that China’s 12^th Five Year Plan includes a host of policy measures that would benefit not only China but the United States as well. A great example where we have shared interests in this area is China’s effort to improve intellectual property rights protection. Many of us were encouraged by China’s decision last year to establish a State Council-level leadership structure, led by Vice Premier Wang Qishan, to lead and coordinate IPR enforcement. This initiative is clearly in the interest of U.S. companies, and it’s also in the interest of innovators in China.

In fact, many of the compelling priorities for the United States and China following leadership transitions in each of our respective countries are internal in nature – jobs, economic growth, the environment, social equity – and will require imaginative and innovative solutions to which many of you in this audience will contribute. 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 other’s expense. As we move forward, I believe there are several key areas where we can simultaneously advance U.S.-China economic relations, strengthen the American economy, and help China accomplish its own domestic agenda.

In fact, if we examine the 12^th Five Year Plan, we can identify several of these areas where stronger bilateral cooperation would be mutually beneficial, including:

• Encouraging China to maintain a policy environment for innovation that respects intellectual property rights and trade secrets and is non-discriminatory will benefit American companies and Chinese innovators, and it will also allow closer collaboration between Chinese and foreign companies.
   
• Collaborating on the environment, clean water, and climate change by fostering exchanges of scientists and policymakers will be beneficial to the global environment, including here in the United States, and also can help combat environmental degradation in China as well as help address the problems of social instability and ill health that its enormous reliance on coal and other major CO2 emitters produce.
   
• Working together to increase Chinese investment in the United States, which would help balance our economies, contribute to domestic jobs and growth here in the United States, and support China’s more outward orientation.
   
• Improving linkages between American and Chinese small- and medium-sized enterprises (SMEs), which will create more jobs in both the United States and China, as well as promote a healthy environment for private firms.
   
• Ramping up agricultural trade would lead to more U.S. exports and would help China meet its food security needs.
   
• Cooperating in the area of product safety can promote the health and citizens in both of our countries, and we have made excellent progress through the FDA and other agencies.
   
• Working together on financial sector reform will advance economic development in China, ensure that capital is used more efficiently, as well as provide more opportunities for U.S. financial firms to operate in the Chinese market.
   
• And, similarly, encouraging service sector opening will lead to a more consumption-driven economy where U.S. firms can play a role.

And, importantly in all of the above areas, the United States and China share a mutual interest to bring together Chinese and American governors and provincial and municipal leaders to collaborate on economic, energy, and environmental issues, which can provide a series of mutual benefits, including:

• boosting American exports to China,
• providing Chinese consumers access to U.S. services and education,
• promoting scientific exchanges, and
• encouraging Chinese investment in the United States.

And that’s one of the reasons I’m excited to be in Nanjing today, as I’m looking forward to engaging the provincial and municipal leadership on these issues. And yesterday, I was in Hefei where I met with local leaders as well as visited the recently launched Eco-Partnership between Hefei and Columbus, Ohio.

This eco-partnership features cooperation projects between Ohio State University and the Hefei University of Technology in the areas of electric vehicle technologies, wetland conservation, energy efficient buildings, and urban planning – a terrific example of a tangible win-win opportunity. I believe there are more opportunities than ever before to make these kinds of connections and make progress in S&T cooperation. And, of course, American companies already are cooperating with Chinese counterparts.

For example, last year, I visited Chengdu and joined General Electric (GE) at the launch of its “Ecoimagination Challenge,” which aimed to support exchanges between American and Chinese clean energy entrepreneurs seeking to nurture fresh ideas in the area of energy efficiency. The above points are just a few of the areas where we have opportunities for enhanced bilateral cooperation and collaboration – I know there are many more. But there also are obviously a number of challenges that we need to overcome in the relationship.

Challenges for the U.S.-China Economic Relationship

Today I would like to focus on five specific areas where the United States and China will need to address differences in the future. These points reflect an American perspective on the difficulties China faces as it emerges as an economic power and seeks to become more integrated into the global economy.

• First, as China seeks to have its companies accepted abroad as investing for purely commercial purposes, it will find it hard to be convincing if those companies operate in sectors that are protected from foreign competition or roped off against foreign investment. The “China 2030” report by the State Council’s Development Research Center and World Bank demonstrated that China’s growth model relies too heavily on industrial policies that give unfair advantage to domestic firms, particularly SOEs. Unfair and preferential practices include subsidies, access to below-market financing, and discounted energy and land. Ending these practices will take political courage on the part of the Chinese government, as it will require in some cases taking on deeply entrenched vested interests throughout China. The United States continues to press China to facilitate a global economic environment that is consistent with “competitive neutrality” so that all firms, regardless of their form of ownership, can compete on a level playing field. And we also are concerned about protections China offers to its so-called “Strategic Emerging Industries” (SEIs). We have made some progress on addressing these concerns on unfair practices through continued bilateral engagement. Under the economic track of the May 2012 Strategic & Economic Dialogue, China agreed to consider reforms that would reduce privileges currently enjoyed by its SOEs and move toward a more flexible exchange rate system in which the market plays a greater role. I also personally have raised these issues with Chinese officials during the past year at two other bilateral dialogues – the 4^th U.S.-China Investment Forum in Washington and the 9^th State-NDRC Dialogue in Beijing. We want to continue to work with China to address this issue.
   
• Second, if China wants to be a world leader in an information age, it will find it difficult to do so if it restricts its people’s access to information. The United States remains concerned with the widespread censorship and restrictions on access to information that is prevalent in China, including, in particular, surveillance on the Internet. Getting around the restrictive “Great Firewall” on the Internet in China costs Chinese and foreign businesses both time and money. However, despite these economic costs, Internet restrictions in China appear to have worsened – creating serious human rights concerns as well. The right to freedom of expression, assembly, and association are protected in a body of well-established domestic and international law. Censorship in any form hampers the free flow of information and freedom of expression – and the innovations associated with them. If China tries to preserve an information environment that is closed or fractured, the costs are high and cumulative. Education, innovation, research, creativity, entrepreneurship, investment, and growth will all eventually suffer. A free flow of information is needed to enable an open exchange of ideas on which creativity and innovation is based. And we will continue to engage our Chinese counterparts in this area through the U.S.-China Internet Industry Forum and other dialogues.
   
• Third, if China wants to be a leader in innovation in the decades ahead – and needs to be in order to shift away from industries that can only be competitive with low wages – it can only do that if it protects the intellectual property of its own citizens and others.  A critically important issue for innovators and inventors is to know their intellectual property is protected and their rights are enforced. Such protection has a major and beneficial impact on jobs in, and the profitability of, the most innovative sectors. IP theft – whether through illegal downloads or other means – stymies innovation. For the United States, this is a critically important issue, and we want to work with China to strengthen its legal environment in order to address this issue. But I also want to emphasize that the protection and enforcement of intellectual property rights is critical to foreign and Chinese rights holders. We believe many Chinese companies have a strong interest in the success of this effort as they develop more innovative products and want their intellectual property respected. So there are many areas where we can make common cause with Chinese companies. And I was greatly encouraged this past May when I was able to attend the second round of the U.S.-China Innovation Dialogue, which addressed many of these concerns.
   
• Fourth, as China depends on an open trading system, it will encounter serious resistance to open trade if its own policies are not consistent with basic principles of the system. 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, doing so is also in Beijing’s interests. More broadly, China will improve relations with many nations and the trade opportunities for its own companies if it avoids practices that may not be strictly illegal under the WTO, but which are inconsistent with the organization’s principle of fairness and non-discrimination. In a couple of weeks, my colleagues at the Department of Commerce and U.S. Trade Representative will host the Joint Commission on Commerce and Trade – the primary venue where we discuss bilateral trade issues. I am hopeful that we will make additional progress this year, as we have done successfully through the many previous iterations of this dialogue.
   
• Fifth, as China seeks to ensure a stable and reliable supply of energy and raw materials it will find it hard to do that unless its companies abroad act in a manner consistent with global norms with respect to labor practices, environmental concerns, and other aspects of good corporate governance. In the developing world – Africa, Latin America, and Asia – the United States and China should promote international norms with respect to rule of law or transparency in their investment and development activities.

Good practices include:

·         engaging with local communities and civil society,

·         recognizing the importance of broader social and environmental responsibility, and

·         creating economic opportunities and upward mobility for local employees through on-the-job training and ongoing workforce development.

I am hopeful that we will be able to identify mechanisms through which we can encourage cooperation in these important areas.

The Future of U.S.-China Relations

In closing, I would like to say that despite the challenges, I am very optimistic about the future of the U.S.-China economic relationship. I know there are reform-minded individuals in China who will help this country take necessary steps, and there is the “next generation of China Hands” in the United States that will collaborate with our friends in China to move the relationship forward.

And the tremendous thing about being at the Hopkins Nanjing Center is that I know I am speaking to future leaders on both sides of the bilateral relationship. Much of the future of the world in the 21^st Century will depend on how well China and the United States sustain growth in our own economies, manage our relationship with one another, and together address challenges facing the global economy. If we can successfully strengthen this evermore complex and important relationship, both countries will be better for it. And we are looking to all of you – our future leaders – to lead the way.

It will not be easy – the challenges are great. But I am confident that, as Deng Xiaoping once said, you will be able to work together to “cross the river by feeling the stones.”

Thanks very much.