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Secretary Henry Paulson, “U.S.-China Economic Relations – preview the 5th Strategic Economic Dialogue meeting,” December 2, 2008

Remarks on U.S.-China Economic Relations.
December 2, 2008

December 2, 2008

Secretary Henry M. Paulson, Jr.
Remarks on U.S.-China Economic Relations

Washington- Good afternoon.  I am pleased to join you and preview the SED, the Strategic Economic Dialogue's fifth meeting, which will begin Thursday in Beijing.    I am particularly pleased to appear before the World Affairs Council, an organization dedicated to expanding understanding of global issues.  

President Bush and President Hu formed the SED in late 2006, to foster direct engagement as the optimal way to build a mutually beneficial economic relationship. They agreed that, because of the many critical economic issues between the U.S. and China, a new approach was warranted --- and so for more than two years the SED has brought together government leaders from the highest levels in both nations to prioritize and work on issues of the day while also setting long-term objectives and building a stronger, long-term, strategic relationship.
Direct Engagement Yields Results
We have learned that engagement works, that engagement can help achieve meaningful, tangible results that would not have been possible otherwise.   Just this year, we had a productive SED meeting in June, a productive Joint Commission on Commerce and Trade meeting in September, and on-going meetings on a variety of issues --- from economics and trade to product safety to transportation.

Engagement has helped us manage the current financial market crisis. This crisis is a global event, and governments around the world have engaged directly and responded with actions to restore stability and address market developments.  International cooperation and coordination have been robust.  In this regard, we appreciate the responsible role China has played during the turmoil.  We have welcomed China's active participation, along with other members of the G-20, in the Summit on Financial Markets and the World Economy, and in multilateral mechanisms for cooperation including the G-20, APEC, and the International Financial Institutions.

Looking ahead, as we agreed to at the Summit held a few weeks ago, it is critical that the United States, China and other major economies continue our vigorous efforts and take whatever further actions are necessary to stabilize the financial system, including using appropriate monetary, fiscal, and financial regulatory policies.  We have also agreed that major economies will reconvene before May 2009 to review progress.
Engagement with China has helped us manage and address issues surrounding consumer and product safety.   Under the leadership of Secretary Leavitt, we have completed two Memoranda of Agreement, established three FDA offices in China, and developed a true culture of collaboration between our respective health ministries.  Now we need to intensify our work further, to build quality into each stage of the manufacturing and distribution process, and engage stakeholders among the private sector, academia, and all levels of government.

Even during a period of trade tension, the SED has helped us manage difficult issues and kept our markets open to trade and investment.  We have avoided harmful and counterproductive market-closing initiatives and productive negotiations are underway on a new Bilateral Investment Treaty.  Our cooperation benefits from the common premise that countries benefit their citizens greatly when they open themselves to competition, reform their economies, and welcome foreign investment.  Direct investment, such as manufacturing plants or service companies, is the ultimate vote of confidence in any economy.  

In the area of transportation, the SED was instrumental in achieving a landmark civil aviation agreement in 2007 and launching a Transportation Forum this year to identify and address the key transportation challenges affecting trade between our countries.
We have developed a constructive and productive rhythm to our interactions. Half of the U.S. Cabinet and our Chinese counterparts meet and talk twice a year, build trust, work through misunderstanding and crises and, wherever possible, expand common interests.  We have built confidence in our ability to work together.  And between each Cabinet-level meeting there have been hundreds of meetings, videoconferences and teleconferences to advance issues further.

We have grappled with the most important and challenging issues in our bilateral economic relationship, issues like rule of law, transparency, innovation, rebalancing growth and intellectual property rights.  Our discussions have been uniformly candid, meaningful, and respectful. 

Preview of Fifth SED Meeting
Our meetings later this week in China will focus on the building blocks for an enduring U.S. – China economic partnership.  We will continue to work on strategies for managing macroeconomic risks and promoting balanced growth; open investment and trade policies, including strengthening product, food and drug safety; our respective roles in international institutions and strengthening cooperation in energy and the environment.  And, we will discuss a new topic as well – for the first time during the SED, the U.S. and China will focus on how our two countries can work together through international forums to strengthen the global economic system.

China's structural reform agenda, including exchange rate reform and financial sector liberalization, will continue to be a central focus of our discussions in Beijing.  We will also take advantage of the opportunity to discuss other critical policy issues, including our respective commitments to maintaining open trade and investment policies, measures we are taking to improve financial regulation, and opportunities to cooperate in supporting emerging and developing countries through multilateral institutions such as the World Bank and International Monetary Fund.  Consumer and product safety will also, of course, be a significant focus.

I am grateful to my Cabinet colleagues for their contributions to, and support of, the SED these past two-plus years, and for their participation in this week's meetings, including Secretaries Chao, Leavitt and Schafer, Ambassador Schwab, Assistant to the President Dan Price, Director Nussle, Administrator Johnson and our Ambassador to China Sandy Randt.

Current Economic Conditions
Our discussions of balanced growth, open investment and trade and international economic cooperation couldn't come at a more critical time.  The United States economy has turned down sharply, the Chinese economy and the global economy have also slowed.  Both the U.S. and China have been engines of global economic growth.  The strength of our economies is not only critical to our own citizens, but to people in every corner of the globe.  The world will watch both of us as we grapple with these difficult economic times.
Fifteen months ago the U.S. housing correction spilled over into the financial sector, pushing the banking system into stress. Consequently, the overall U.S. economy has suffered.  On October 31, third quarter GDP showed negative 0.5 percent growth.  The unemployment rate has risen to a level not seen in 15 years, with a loss of 240,000 jobs in October alone.  Data released on November 25 showed that through September, home prices in 10 major cities had fallen 19 percent over the previous year, demonstrating that the housing correction has not abated.  And as the U.S. economy slows further, it threatens to prolong the housing correction.

The authorities and capacity granted by Congress have been the key to avoiding a financial collapse.  Looking forward, working with the Fed and the FDIC we now have the tools and the commitment to do what is necessary to maintain the stability of our financial system.  Many challenges lie ahead and progress will not be in a straight line, but I believe we have taken the necessary steps to put us on the right path to recovery and an eventual return to prosperity. The excesses in our system built up over many years, and it will take time to work through them.

China's Economy
While China itself has been relatively insulated from the current financial turmoil, it still faces mounting economic challenges.  As global economic growth slows, so too will demand for Chinese exports.  And as Chinese leaders are acutely aware, China's economic growth has already begun to slow.  In November, China announced a major fiscal stimulus package to strengthen domestic demand, a welcome policy measure for sustaining global growth.  And the rural land reform plan announced in October has the potential – if effectively implemented – to help China make significant inroads in its efforts to boost rural productivity.  These are important steps and we urge China to seize the opportunity to build on them.

Now is an opportunity for China to take measures to ensure sustainable, strong and balanced economic growth for its future.  This means relying more on domestic demand and less on exports to drive growth.  Making this shift will take bold leadership and decisive structural reforms to boost demand among households and to improve the allocation of capital within the Chinese economy.  As I have emphasized in the past, continued reform of China's exchange rate policies is an integral part of this broader reform process. China has appreciated the RMB over 20 percent against the dollar since 2005 – this is important and significant, but it is important that the reform process continue.

Addressing the needs of each of our economies is both a short-term and a long-term process.  In the midst of this crisis, our priority must be stability and recovery.  As we take steps now to address the immediate needs of our economies, there are significant lessons we must learn, which in turn will help us reform our global economic system to prevent this from ever happening again 

Addressing Energy and Environmental Challenges
The second major topic for the SED this week is addressing the energy security and environmental protection, challenges faced by both our nations.

The United States is the world's largest consumer of energy, the world's largest consumer and importer of oil and the world's second largest source of greenhouse gas emissions.  As the world's largest and fastest-growing emerging economy, China knows what the United States has learned: economic prosperity also increases energy demand and environmental degradation. To fuel economic growth, China relies on domestic coal for 70 percent of its energy needs.  The consumption of coal has led China to overtake the United States as the world's largest source of greenhouse gas emissions.

Growing economies need to move goods and people, and increased transportation has led to a near doubling of China's oil consumption over the last decade.  China is now the world's second largest market for new vehicles, and the second largest consumer of oil, behind the United States.  Building cooperation and trust between our countries can help prevent future competition over scarce energy resources.

Mutual interest in jointly tackling these energy and environmental challenges has given rise to a hallmark SED achievement --- the Ten Year Framework for Energy and Environment Cooperation.

Signed at last June's SED meeting, this is a comprehensive framework to promote collaboration between the United States and China to advance technological innovation, adopt highly-efficient clean energy technology, and promote natural resource sustainability.

Our initial efforts within the Framework have focused on developing shared objectives in five areas: electricity generation, transportation, clean water, clean air, and protecting wetlands and other natural areas. We will announce agreements at this week's SED detailing joint cooperative actions and the establishment of short, medium and long-term deliverables in each of these areas.

The Ten Year Framework is intended to augment multilateral efforts on climate change, such as the United Nations Framework Convention on Climate Change.  The UN Convention is also being actively supported through the Major Economies Process, a parallel effort initiated by President Bush in September of 2007.  Earlier this year, the Treasury Department led the creation of an international clean energy technology fund at the World Bank to address climate change worldwide. This multibillion dollar global effort is aimed at enabling the deployment of cleaner, more efficient technologies in developing nations by closing the financial gap that exists between current industry practices and available advanced technology.

In drawing distinctions among these many important energy and environmental efforts, it is helpful to think of the Ten Year Framework as focused on building the capacity to address specific challenges faced by the United States and China in meeting energy and environmental goals.  Our countries are approaching these solutions in similar ways, by ensuring implementation of proven and effective policies, educating our citizens so that they can make environmentally sound decisions, and increasing the affordability of new or existing technology by reducing market access barriers.

In addition to the Ten Year Framework, at last June's SED meeting we agreed to actively explore EcoPartnerships to demonstrate new models for sustainable economic growth. Targeted at the sub-national level, these are voluntary, cooperative partnerships between U.S. and Chinese entities. They include local, state or provincial government-to-government partnerships, and partnerships among businesses, universities and non-profits.  The Chinese have loosely modeled EcoPartnerships after the `Special Economic Zones' created in the 1980s, where economic reform policies were tested in targeted areas such as Shenzhen and Hainan Province before introduction to the whole of China.  EcoPartnerships bring a similar approach for energy and environmental innovation and policies.

At this SED meeting, the United States and China will recognize the establishment of initial EcoPartnerships. As an example, we have actively discussed a partnership between the city of Greensburg, Kansas and a town in Sichuan province. Both towns have been devastated by natural disasters. On May 4, 2007, Greensburg was nearly completely destroyed by a tornado, and the Sichuan province suffered massive damage from an earthquake last May. Greensburg has made a commitment to rebuild in an environmentally sustainable manner, with all new buildings adhering to LEED-platinum standards. The city is also actively working to create a new model for economic development based upon green business and industry. The Sichuan town will also focus on rebuilding with environmentally sustainable development and green businesses.  Through this partnership, and the relationships that develop between U.S. and Chinese industry as part of this partnership, our two countries will develop a new low energy intensive model for sustainable economic growth.

With both the Ten Year Framework and EcoPartnerships, we have benefited from the ideas and leadership outside government, and especially the private sector, in addressing the energy and environmental challenges faced by our two countries. Yesterday, we held the first meeting of our new Federal Advisory Commission on energy and environment cooperation with China, bringing together leaders from academia, NGOs, and the private sector to discuss additional ways to accelerate and enhance these efforts. And this past summer, I was pleased to recognize the public-private partnership that made the 2008 Olympic Games the most environmentally sustainable version of the Games through the award of a LEED Gold Award to the Olympic Village complex.

Addressing Shared Challenges through Concrete Actions
As both countries begin to implement the Ten Year Framework, we recognize that many changes will occur in the United States and China over the next decade.  To ensure that the Framework endures and remains relevant, we have developed a durable organization with sufficiently flexible goals.  The success of an initiative spanning ten years will depend largely on clearly defining early expectations and immediately addressing initial concerns. We have jointly focused our efforts in this way.

These first steps represent some very promising progress, yet we also recognize that neither China's nor the United States' energy and environmental challenges will be solved quickly. Our goal has always been to make long run, meaningful achievements through the ingenuity, commitment and dedication of government, business, and scientific leaders.

China will continue to play a key role in the world economy, and China's growth is an opportunity for U.S. companies and consumers, for our producers, exporters and investors.   A stable, prosperous and peaceful China is in the best interest of the Chinese people, the American people and the rest of the world.

These first years of the Strategic Economic Dialogue have demonstrated that direct engagement achieves results.  Just as importantly, it has improved the relationship between our two countries so that we can effectively manage complex issues, such as the recent global financial turmoil.  What we have accomplished is due, first, to the vision of President Bush and President Hu and second, to the hard work and open discussions among all officials.  We have stood many tests so far, and I believe we can withstand many more if we continue to engage with China as it is, not as we would imagine it to be. 
Thank you.