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U.S. Amb. Alan F. Holmer on Establishing New Habits of Cooperation in U.S.-China Economic Relations, 2007

Holmer spoke on Nov. 14, 2007 at Tsinghua University. He is special envoy for China.
November 14, 2007

November 14, 2007

Remarks by Ambassador Alan F. Holmer at Qinghua University Entitled Establishing New Habits of Cooperation in U.S.-China Economic Relations

Beijing - Good evening. It's a pleasure to visit Qinghua University today. Your institution has provided China with an abundance of its top political, business and academic leaders, many of whom have played critical roles in advancing the U.S.-China relationship. I applaud their efforts. I hope many of you will embrace their commitment to the U.S.-China relationship in your future careers.

Personal Reflections

When I became Special Envoy for China and the Strategic Economic Dialogue in February of this year, Vice Premier Wu Yi encouraged me to visit the parts of China beyond Beijing and Shanghai. I happily followed her advice. During this year, I have been privileged to visit Shenyang, Qinghai, Xian, Chengdu, Guangzhou, Shenzhen and Hong Kong. My trips have included several visits to rural villages to see the depths of the challenges you face in promoting balanced, harmonious growth.

The complexity of your country is fascinating – and daunting. I have found China to be: rich and poor, modern and ancient, Communist and capitalist, reforming and conservative, and passive and proactive. I am deeply impressed with China's dynamism, creativity, and diversity.

President Bush and Treasury Secretary Paulson recognize that a prosperous China and stable bilateral relations are in America's interests. Yet, China is so large and populous that by merely changing itself China is also changing the world. This situation has created both challenges and opportunities for U.S.-China economic relations. I would like to outline my views on those today. Our Changing Economic Relationship

China's re-emergence on the global stage is one of the most consequential geopolitical events of recent times. There is hardly an issue – from trade, to national security, to climate change – or a place – from North Korea to Iran to Sudan – where American and Chinese interests do not increasingly overlap. Because China is so fully integrated into the global economy, what happens in China's economy affects the entire international community.

A cooperative, constructive and candid U.S.-China relationship is central to understanding and responding to China's rise, in all its possible manifestations.

As I look across the U.S.-China economic relationship, it is clear to me that this relationship is entering a new phase.

First, U.S.-China economic interdependence is deepening. We need each other more and on a broader number of economic and economically consequential issues. Over the past 5 years, according to U.S. data, U.S. exports to China have grown from $18 to $52 billion, while U.S. imports from China have grown from $102 to $287 billion

Moreover, the United States and China are shaping, and being shaped by, global energy and environmental trends, which have strong economic consequences. For example, our countries are the world's largest energy consumers and the largest emitters of greenhouse gases.

Second, whereas trade and investment were once largely a source of stability in bilateral relations, they are now increasingly also a source of tension. Such tensions are straining the domestic consensus in both the United States and China on the benefits of economic engagement.

When I first became deeply involved in international trade issues in the 1980s, we didn't have significant trade tensions with China – mainly because we didn't have much bilateral trade. In a sense, the fact that we have trade tensions reflects a maturing of our relationship and the rapid growth in bilateral trade and investment. We need to make sure we manage those tensions effectively in order to keep our bilateral economic relationship on an even keel.

Raising trade issues within the WTO is a normal mechanism for addressing disagreements among equal, sovereign trading nations. According to WTO statistics, the United States has had 99 cases filed against us since the WTO's founding in 1994; and the United States has filed 88 cases against 28 countries. In the case of China, five cases have been filed against China by the United States and two cases against the U.S. by China. The EU has brought the most cases against the United States (31), followed by Canada (14).

Anxieties about increasing trade manifest themselves in several ways, which leads me to the third dynamic confronting us: the rise of economic nationalism and protectionism in both our nations. These sentiments may constrain leaders from adopting policies that are in the long-term interests of the citizens and economies of the United States and China.

In responding to globalization, policymakers in both countries must resist the impulse to discard the hard-fought and long-term gains of open economies by pursuing short-term and misguided policy responses. [For example, in the U.S., the Bush Administration continues to oppose congressional proposals, addressed at China's currency practices, which would be counter-productive and pose risks to the U.S. economy. At the same time, Chinese barriers to U.S. exports and investment, in the context of a large and rising Chinese current account surplus and protracted large-scale interventions in foreign currency markets, make it more difficult to keep the U.S. economy open.

These three emerging dynamics to our economic relationship – deepening interdependence, a strained policy consensus, and the rise of economic protectionism – are mutual and require cooperative solutions. Managing Complexity and Establishing New Habits of Cooperation

These dynamics informed the creation of the Strategic Economic Dialogue (SED) by President Bush and President Hu Jintao in 2006. They envisioned a forum to allow both governments to communicate at the highest levels and with one voice on issues of long-term and strategic importance.

Managing our complex and increasingly interdependent relationship is daunting – and requires speaking to the right people – at the right time – on the right issues – and in the right way.

I learned a long time ago that if you are going to be successful in any kind of dialogue, it is essential that you do everything you can to put yourself in the other person's shoes, to try to see the world the way he or she does. This is the way you achieve win-win agreements, ones that advance mutual interests, agreements that will withstand the tests of time. The Strategic Economic Dialogue embraces this approach.

As a new and leading institution in U.S.-China relations, the SED has created useful channels among policymakers in Washington and Beijing. In doing so, we are re-setting the foundation for stable and prosperous economic interactions.

The United States has three core objectives for the SED.

Establishing New Habits of Cooperation

First, through this framework, we are advancing the U.S.-China economic relationship by establishing new habits of bilateral cooperation.

We have embraced a broad agenda that covers cross-cutting economic and economically consequential issues, including regulatory transparency, energy conservation, environmental protection, innovation, food and product safety, as well as the important economic issues of exchange rate and macroeconomic policies, market access, and financial sector development and liberalization.

Our approach engages multiple and diverse government officials in both countries to facilitate more inclusive interactions. It breaks down classic bureaucratic stove-pipes that hinder effective communication and impede results. At the same time, we have continual, high-level interactions to set priorities and ensure their full implementation.

Having said that, good process does not ensure good results.

Dialogue among senior Chinese and American officials, while useful, needs to be more than talking for the sake of talking and can not give leaders "a pass" on issues of disagreement. It is about setting priorities, specifying consequences and fashioning practical solutions.

And that's what direct engagement does: it keeps the relationship on an even keel by lessening miscommunication and dispelling misperceptions so common in the history of the U.S.-China relationship.

It helps us signal to China that we welcome the rise of a confident, peaceful and prosperous China. A weak and insecure China is not in America's economic or security interests.

Accelerating China's Economic Transition

Second, it is vitally important that our policies accelerate the next wave of China's "reform and opening" process. The pace of China's growth has clearly been remarkable, but continued effort is needed.

China's top leaders now realize that a key challenge they face is taking the bold policy steps necessary for an economy that is no longer in the first stages of economic growth.

We applaud the leadership's current efforts to transition to an economy that is more market-oriented, less reliant on low-value added manufacturing exports, one that depends more on the skills and resourcefulness of the Chinese people and less on material inputs and natural resource consumption.

A major risk China faces is that its government won't act quickly enough to take the policy steps necessary to deal with the economic and social imbalances created by its growth model. Without strong policy adjustments, China's economic growth path becomes unsustainable, as Chinese top leaders have publicly stated. We are encouraging key reforms that will help China manage the blistering pace of its economic growth; these include financial market liberalization and a plan for rebalancing growth. China has proven to the world that it can grow fast, but can it grow differently and, ultimately, sustainably, where the quality of growth is as important as the quantity.

Bold structural policies are needed to shift China's growth away from heavy industry, high energy use, capital intensiveness, and dependence on exports – towards greater reliance on domestic demand, production of services, and a greater share of China's national income accruing to China's households.

To enable market forces to efficiently rebalance the economy and spread prosperity to all the Chinese, China needs more flexible prices, including a much more flexible, market-driven exchange rate. Exchange rate flexibility is also key to allowing monetary policy – the most potent instrument for guiding an economy – to focus on assuring price and financial stability.

Also, the RMB's exchange rate is increasingly being viewed by many countries as a source of unfair competition. A growing number of national leaders and multilateral institutions are calling for currency appreciation. The IMF's annual meeting held in Washington last month concluded with a communiqué that called for greater flexibility of the RMB.

The IMF communiqué acknowledged that an orderly unwinding of global imbalances while sustaining global growth is a shared responsibility. For America, it requires, among other things, steps to boost national saving in the United States, including continued fiscal consolidation. I'm pleased to report that we are making progress, though our work is not done. According to the latest data, the U.S. federal budget deficit fell by about half, from 2 ½ % of GDP to 1 ¼ % between 2005 and 2007.

A key to China's future success will be its willingness to accelerate the pace of its market-based economic reforms. Meeting and going beyond its WTO commitments, resisting protectionist sentiment, and opening up its economy to greater international competition for goods, and particularly, services, will help rebalance the Chinese economy and spread prosperity more broadly among the Chinese people.

These reforms are – and will continue to be – resisted by increasingly influential Chinese businesses. In my judgment, the greatest risk to China's long-term economic security is not that China opens too fast, but, rather, that protectionists prevail, and Chinese reforms proceed too slowly.

Encouraging China's Responsible Global Engagement

Third, and finally, we are also encouraging China to act responsibly as a global economic power. We welcome China into key international financial institutions and are giving China a greater voice in them as well.

Since the initiation of the SED in September 2006, we have supported China's efforts to join the Inter-American Development Bank (IADB) and the Paris-based Financial Action Task Force (FATF). We also strongly support a greater voting share for China in the IMF and World Bank.

Increased participation will allow China to advance its interests in those institutions, but it is also important that Beijing recognize the responsibilities of greater participation.

China has become a major source of foreign aid for many of the poorest countries. We look forward to working with China, as a new and welcome participant, in multilateral efforts to assure that foreign aid and lending practices promote sustainable development.

This new era in U.S.-China economic relations requires new and dynamic ways of doing business. We are meeting these challenges through the creation of the political space and the institutional capacity for long-term stability in our bilateral economic relations. Our Guiding Principles

Our strategy for pursuing these objectives is guided by the principles of shared responsibilities and shared benefits. Although simple - perhaps deceptively so - these principles form the core of an economic logic that is key to supporting deeper reform in China and advancing U.S.-China economic relations.

I raise shared responsibilities and shared benefits to underscore that U.S. economic policy towards China does not spring from a desire to shape China in the image of the United States or according to another model of economic development. China is a sovereign nation with a unique history, culture, and economy. Nonetheless, we hope Chinese leaders will fully appreciate the depth of the U.S. experience in building a strong and open economy.

The SED's approach towards China is based on sound lessons from history, a firm belief in the role of markets, and recognition that the United States and China have common strategic interests. It reflects an economic imperative for China to pursue market-based reforms that are central to sustainable, non-inflationary growth.

By acting on these principles of shared responsibilities and shared benefits, U.S. and Chinese policymakers can continue global economic integration and maintain stable relations. Together, we will incur costs, shoulder burdens and reap benefits. The risk here is that – by not standing up to meet our shared responsibilities – the citizens of China and the United States will not share in the future benefits. Signposts and Benchmarks

While dialogue and negotiations are important, they are far from sufficient to ensure that we keep the bilateral relationship future-oriented and on an even keel. Tangible progress is critically important to demonstrating that we are achieving our long term objectives.

In May, we announced a new air services agreement that will double passenger traffic between the United States and China by 2012 and allow full air cargo services between both countries by 2011. In addition to the commercial gains for both countries, additional benefits include more commerce, greater cultural exchanges, and enhanced understanding.

We are collaborating with China on a series of policies to foster demand for the development and deployment of clean and efficient, next-generation energy technology. This, in turn, will create a future in which two of the largest economies in the world become examples of bilateral cooperation towards sustainable development.

In the SED, we are working with China to develop more modern and efficient capital markets in China. This will also help China move more quickly toward a market-determined exchange rate which will improve the government's ability to use monetary policy to promote price and financial stability.

Our enhanced dialogue has allowed us to confront problems frankly and honestly – and often rapidly. Recent and repeated reports of tainted food and product imports are causing fear and uncertainty in American consumers and harming the "Made in China" brand in the United States.

The effectiveness with which China manages these safety issues will have long term implications for U.S.-China trade relations, the integration of China into the global trading system, and the sustainability of China's economic growth. We also need to make sure that policymakers in both countries are focused on science-based safety decisions, not protectionism or retaliation.

Our next cabinet-level meeting of the SED in December in Beijing will discuss a number of these objectives. Specifically, we will focus on the integrity of trade, balanced economic development, energy conservation, financial sector reform, environmental sustainability, and advancing bilateral investment.Towards a New Future for Bilateral Economic Relations

President Bush and President Hu have set a positive agenda for strengthening our economic relationship. The SED is a core part of that agenda because it is long-term in its vision, comprehensive in its scope, and immediate in its ability to deal with the most sensitive bilateral economic tensions.

The economic and geopolitical landscape of the 21st century will be greatly influenced by the way in which the United States and China work together. That emerging future requires a distinct vision and effective mechanisms to achieve it. By establishing new habits of cooperation, the SED has allowed both the United States and China to begin to write the next chapter of our strategic economic relationship.