U.S.-China Trade

When: June 17 and 18

Where: US Naval Academy - Annapolis, MD

Who: Co-Chairs US Treasury Secretary Henry M. Paulson, Jr. and Vice Premier Wang Qishan

Why: To strengthen and deepen the bilateral economic relationship through actions to:

• raise questions
• seek consensus
• implement results
• prevent trade protectionism and conservatism from hampering the trade cooperation

What: An overview of China and the US coming to the table to discuss the following areas:

1. Macroeconomic Cooperation and Financial Services.  The countries pledge to work together toward sustained growth, stability in price and financial systems, and agreed to continue a collaborative approach to sharing information on issues of mutual interest.
2. Investment in people and Product Quality and Food Safety. Agreed the need to open up communication regardingt mitigating economic risks associated with aging populations in both countries, and to use this as a platform for investigating ways to provide better healthcare and retirement services. Bilateral efforts to continue activities determined at SED III for product safety on an ongoing basis.
3. Cooperation on Energy and the Environment. Mutual understanding of the importance of cooperating to address challenges. Both countries expressed the desire to strengthen commitments to energy and the environment.
4. Trade and Competitiveness. Challenges of trade were discussed, as well as actions that would support each nation’s economy within the larger picture of globalization.
5. Investment. China and US came to an agreement on a series of actions that will be taken to create a mutually beneficial investment path for and between both.

After the US initiated two WTO cases* against it last year, China has since worked to develop a National IP Strategy, requiring China to “explore the possibility of establishing specialized IP courts to deal with IP-related civil, administrative, and criminal cases.” The strategy was developed by China’s National Working Group for IPR Protection, which was established in 2005. The body is made up of 13 officials from 12 IP-related agencies and ministries, such as Commerce, State Intellectual Property Office, and Customs.

Released June 17, this new, unified system would help to more easily transfer administrative cases to criminal enforcement courts. The new strategy also seeks to realign jursidiction in order to appropriately address cases requiring specific, technical knowledge, such as with patents. Successful implementation of this strategy would result in:

• improved judicial interpretations
• refined litigation procedures
• beefed up subject matter expertise using expert witnesses and technical investigations
• improved patent standards policy
• mechanisms for compulsory licensing

This series of events validates the effectiveness of escalating trade malpractices to the WTO. So long as overarching governance systems are in place to provide check and balances, neutralizing the economic disparaties globally becomes an more approachable issue. Although time will tell whether this strategy truly addresses global concerns of Chinese IP policy and enforcement, steps are being made by the country to advance in the right direction. Engaging its more developed trade partners to share best practices in trade will provide a wider range of perspectives on the matter, while allowing countries like the US feel as though they are being heard.

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* The first case opened against China was in response to an absence of protecting and enforcing copyrights and trademarks, and the second on China’s obstruction of trade of books, videos, music, and films.

At a time of tremendous sensitivity where many of its activities are receiving global attention, China’s investment actions are no exception. The China Investment Corporation (CIC) is China’s firm, which manages its foreign exchange reserves. A sovereign wealth fund, the CIC was established in 2007 in response to enormous state losses, resulting from the rising Yuan and the plummeting Dollar. Despite losing nearly half the value of $3 billion in a Blackstone (a US private equity firm) stock invesment, the CIC is reportedly the fourth-largest SWF worldwide.

Foreign countries have typically been suspicious of China’s foreign investment activities, speculating that its vast wealth could be used to buy majority stakes in companies with hands in western government and policy pots. Americans in particular fear that should China become an unchecked financier, it would become supremely positioned to influence multinational companies such that their policies could be swayed to protect Chinese interests.

To address skeptics in the international community, China has ramped up its PR efforts, with Gao Xiqing, CIC’s President, opening up for interviews and to the media: “Some think we are from a Cold War era and Red China. We are still regarded very much by many countries as a potential threat.” Bristling at all the criticism, he says “Immediately after we announced our existence, then the US government, some European governments, all came out and said, ‘okay, we think of this as - this is a dangerous - we need to do something about it. They probably want to control us. They probably want to do something bad about us.’ “

A huge factor fueling flames of mistrust is the American perception that China has no intention of improving the transparency of its foreign investments. China will claim that its investments are commerically-driven until it’s blue in the face, but when its stock in US financial firms plundered, it held on. The US is simply uncomfortable with being in the dark. To China’s credit, they really can’t seem to catch a break. Every angle is a bad one, it doesn’t matter if the mirror is straight or angled. In response to why China doesn’t want to “touch the military,” Gao says: “Because we are already getting too much, almost unfair amount of attention. You know, the Chinese culture is being self-effacing, try to hide yourself, don’t stick your head out for people to knock on.”

Speaking to the tranparency question, China refutes that as a relatively young SWF, the CIC has not yet had the opportunity to produce and communicate information, as that contained in annual reports. And in tune with China’s commercially-driven investments mantra,  the “but” in China’s pledge to become transparent is that the ceiling will be measured by what is considered to be “commerically-viable.” Can’t really blame them there. What’s the point of trying to make a good investment if everybody knows what’s next, what you can afford, and what you’re looking to get rid of?

China has thus far employed a not unreasonable, middle-of-the-road path forward, shirking investments in sensitive industries and sectors (military factories, tobacco companies, machine gun companies, casinos); aggressively pursuing foreign financial sectors; promising more transparency; and displaying indignation at the notion of leveraging a financial nuclear option*. 

Gao describes the difficulty of navigating from a delicate position between a throng of historically proud Chinese natives (”. . . a lot of other Chinese people are telling us that , ‘Look, you know, you guys should be against it. You should stand up against.’ “) and a frowning foreign populous. Its stance? CIC has walked away from potential investments in unnamed countries after political red flags were waved; “We are trying to get financial returns. If there is too much political pressure and too much unpredictability, you just go away.” How’s that for bottom line?

Another bottom line? The US cannot afford to be without China. Former US Treasury Secretary Lawrence Summers explains the counterproductivity of walking away from China’s money: “It would mean that Americans would pay more for goods. It would mean that our interest rates would be higher.”

With a very American “trust but verify” approach, Summers emphasizes the need to encourage China’s pledge for Norwegian gold-standard transparency. Encourage, but heed with wariness: “I think [China’s investment strategy] is an issue our government does need to pay close attention to,” he adds.

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* Financial nuclear option describes a scenario where China would have a large enough stake in a foreign country’s industries to threaten to pull its money, whereby the country hosting investments would either face an enormous financial collapse or be forced to steer its direction and policy to China’s favor.

An open, public hearing is being held by the US-China Economic and Security Review Commission* in Washington on May 20, 2008. The topic of the hearing is “China’s Proliferation Practices and the Development of its Cyber and Space Warfare Capabilities,” and seeks to collect and share information from academic, industry, and government expertise to identify and determine economic and security impacts occurring as a result of the US’ bilateral trade partnership with China.

This fifth hearing in a series of public hearings will cover the following activities taking place in China:

• proliferation activities
• growing cyber space activities and capabilities
• growing presence and capabilities in outer space

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* The Commission is mandated by Congress to investigate, assess, evaluate and report to Congress annually on “the national security implications and impact of the bilateral trade and economic relationship between the United States and the People’s Republic of China.'’

Prime Minister Helen Clark of New Zealand, left, and Prime Minister Wen Jiabao of China  after the signing ceremony at the Great Hall of the People in Beijing. (China Daily/Reuters)

China and New Zealand have signed a free trade agreement, effective October 1st, marking the first concluded agreement China has signed with a developed country. Talks for this agreement were put in motion in 2004 when NZ granted China market-economy status, a contingency prospective traders must fufill before becoming eligible to negotiate a free-trade pact. (The EU and US still classify China as a nonmarket economy, enabling enforcement of penalties on Chinese goods that are exported at a cost lower than rates of production).

The agreement situates each country to benefit by exporting goods on a tariff-free basis. NZ will phase out tariffs on all Chinese imports by 2016, and China will follow suit by reducing tariffs on 96% of all NZ imports by 2019. The free trade agreeement also provides coverage for trade in services between countries, from insurance and banking to education and labor supply. New Zealand issued a statement, saying “The upfront commitments on goods, services and investment and the mechanisms which provide for further development of the agreement over time should help keep New Zealand at the fore front of the evolution of trade and investment relationships with China.”

One facet of this agreement focuses on sharing eco-friendly best practices, as China seeks to learn carbon emission reduction techniques from NZ in an effort to become proactively involved in climate change. As agricultural products make up nearly half of NZ’s exports to China, it presents the opportunity to educate a growing country on harnessing its assets in an environmentally productive fashion.  

As it relates to China’s position in the global trade community, the success of this agreement has the power to influence Chinese deals with Australia and other countries looking for a similar arrangement.is in the process of authoring 6 more trade agreements, including trade partners Australia, Peru, and South Africa.

The conclusion of this agreement grants NZ expedited, direct access to China’s growing economy, which will only grow as the door swings open and more countries jump on the bandwagon. China is becoming more competitive with the US’ trading stance by enlisting its own bilateral trade partners. NZ’s Clark is reportedly receiving flack for concluding this agreement with China concurrent with China’s controversial human rights conflicts.

China will be setting up shop in Kathmandu April 25-28, driven by Nepal China Executives Council (NCEC) and the PRC Embassy in Nepal to educate the Nepali people on modern machinery, automobiles, electronics, medical and agricultural instruments, and home appliances.  Nepal looks to learn, by China’s guidance, how these industries have propelled successes in China’s tourism and economy. This is the third trade show in a series that began in 2005 to mark the establishment of diplomatic relations between Nepal and China.

The event will give Nepal and China the opportunity to examine strengthening a trade partnership. Nepal will assess the quality of Chinese goods and gain information on the business of production and trade. Chinawill exhibit its products and determine scopes of investment.

Nepal-China trade relations have grown in recent years. One notable milestone being tariff-free treatment of Nepali goods in the Chinese market. China has provided Nepal with “financial and technical assistance” in support of arenas such as infrastructure growth, industry establishment, and human resource development. The government of Nepal’s Ministry of Foreign Affairs measures the volume of such assistance to the tune of “80 million Yuan every year.”

Interestingly, the 2005 kick-off trade fair was jointly launched by Nepal and “China’s Tibet.” The 2008 affair comes at the heels of a whirlwind surrounding the controversey of China’s Tibet crisis: “More than 20,000 exiled Tibetans have been living in China since fleeing their region after a failed uprising in China in 1959.” Nepal continues to support its trade relationship with China, and has yet to issue a statement regarding the crackdown of protestors in its capital city.

We’ve all read that Beijing is bringing its A-game for the upcoming Olympic games. As a major milestone and once-in-a-lifetime opportunity to show face as a key international player, the country is busying itself with strategic preparations to deliver an effective and meaningful sale this summer.The number 8, when pronounced in Mandarin (ba), rhymes with the pronunciation of the word for fortune (fa), which makes it particularly auspicious and dear to the Chinese. It is no coincidence that the date of the opening ceremony is set for 08-08-08, or good fortune x 3 when loosely translated into English.

It is this very east-meets-west sensibility that is coming into play as Beijing finds ways to present its life/country/culture so that when interpreted by Western eyes and ears, is met with a warm - and even pleasantly surprised - response. Ironically, China is looking abroad for ideas and techniques to ensure their tourists are met with comfort and luxury. On the agenda:

1. Address investigations that China is the biggest importer of steroids consumed by the US since its crackdown on Mexico (a hot and timely topic recently propelled by Mitchell, Olympic veterans Jackie Joyner-Kersee and Marion Jones, Sly Stallone, the list goes on.)
2. Ensure sufficient accommodations (renovate, build, grow!) for its visitors
3. Train chefs to create palatable options for tourists
4. Research tools to control environmental precipitation for opening night
5. Regulate factors impacting air pollution, such as vehicle production and traffic
6. Perform wide-spread education campaigns for the local Chinese, to make the city more welcoming and palatable (spitting etiquette, Chinglish clean-up)
7. Aggressively employ Western-style branding* with the games and all of its products [Enter: Friendlies mascots Bei Bei, Jing Jing, Huan Huan, Yin Yin, and Ni Ni, or Beijing Huan Yin Ni = Beijing Welcomes You]
8. Mass advertise to the world using the techniques, drama, and theatrics familiar to American entertainment and media.  What is more telling of China’s spirit, unity, and omnipresence than this Adidas commercial?

* Coca-Cola, Hewlett-Packard, Mattel, Motorola, Foxconn, Nike, Novozymes, Bayer, Genencor, APCO, Shell are examples of global brands participating in this event

January 17 and 18, China and the US held the third round of the Strategic Economic Dialogue in Beijing. 

 The SED is a cabinet-level series of summits began by President Hu Jin Tao and President George W. Bush in August, 2006 to address and smooth over Sino-American disputes such as those surrounding product safety and climate change.

The mid-January two-day dialogue was co-chaired by Chinese Vice Foreign Minister, Dai Bingguo and U.S. Deputy Secretary of State, John Negroponte. Though scheduled to exchange dialogue on steady-state matters such as ensuring the longevity of US-China relations through trade, the timing of this SED round served as a convenient platform to address one front-burning issue gaining steadfast momentum: Cross-Strait relations.

On the heels of Taiwan’s parliamentary elections (held January 12), many saw this event as an opportunity for Beijing to dually:

1) Re-iterate to US the need to restrain Taiwan’s calls for independence. 
2) Send the message to Taiwan that US-China ties are being strengthenedDespite analyses that Beijing has accelerated activities (below) to alienate Taiwan prior to its elections, it seems China’s efforts will ultimately have little impact over the election, as the Taiwanese seem to be voting toward domestic, economic, and social issues — and reportedly see little difference between the DPP and KMT, China’s preferred opposition.

China’s ”activities” :

• Playing its contacts (foreign government officials, business leaders, academics, researchers) to 
  China’s expectation that Taiwanese President Chen Shui-bian will leverage the election to declare independence with the 2008 Olympics in sight. (China is described as stating it would have “no choice but to respond to preserve the territorial integrity of China,” compelling several governments to express concern and back-up the bid to preserve the Cross-Strait status quo.)
• Wooing Taiwan’s remaining diplomatic allies. (With Malawi as an addition, it was reported Taiwan’s foreign minister was left sitting in South Africa after having his visa denied without prior warning)
• Blossoming ties with the Marshall Islands, and Japan. (Oil and gas can buy friends)
• And now, SED III. (Strategically-placed maraschino cherry)

Conclusion (SED III). Negroponte was swift to jump on the wagon, firmly backing One-China, citing the UN membership referendum  . . .  the two sides agreed to look forward to common interest and strengthened cooperation at the Beijing Olympic Games, tra la la.) SED IV will take place later this year, on US soil. We’ll likely be seeing much more on The Motherload, Cross-Strait.

Standby!

The FPA’s Great Decisions 2008 program’s television series broadcasted on PBS offers a show featuring US-China Trade, and summarily introduces a number of issues affecting the global economy and Sino-American relations:

• Agricultural trade. How do China’s geographic, agricultural, and environmental characteristics uniquely position the US to enjoy a mutually beneficial trade relationship with China?
• Manufactured goods. How can the US ensure it remains competitive in this industry alongside China’s growth? How do factors such as foreign investment and technology development make this a fluid relationship?
• Product quality. What are the nation-specific and collective responsibilities of the US, China, and other nations with leading economies in setting and complying with product quality standards?
• Intellectual property rights. How can China ensure it continues to make progress in remaining current with, and enforcing intellectual property laws? What are socio-economic drivers potentially elevating this issue to become a higher priority in China’s trade practices?
• The EU’s economic interest in China. Does the EU’s interest in trade with China undercut US efforts to accomplish bilateral agreements on issues such as use of energy? What are some feasible solutions that can accomplished through plural-lateral discussions?

For more information, visit FPA’s China Trade program and resources here.

China’s Three Gorges on the Yangtze River

With measured holiday celebrations by Americans this year, the US finds itself in a thick and thorny growing trade deficit with
China. Recent reports by the US Commerce Department that overall trade deficits have declined in the past two consecutive quarters may do little to assuage Congress members, who continue to push for punitive action against China for currency manipulation to leverage its trade surplus. To many, a more realistic metric of this damage is better understood when translated into an American loss of more than 1.9 million manufacturing jobs since 2000. An even bleaker truth is illustrated when comparing US-China exports to imports:

We export cotton, we import clothing. We export hides, we bring in shoes. We export scrap metal. We bring back machinery. We’re exporting waste paper, we bring back cardboard boxes with products inside them.  

In stark contrast, Europeans are busying themselves with preparations to contract with the PRC for nuclear reactors and Airbus passenger jets amounting to nearly $30 Billion USD.

The US and China engaged in the third session of the US-China Strategic Economic Dialogue (SED) hosted in Beijing, to make progress on trade discrepancies hindering its relationship. Key issues of focus included food and product safety, energy and the environment, and transparency. Echoing US concerns during this session were the EU, Japan, and the WTO.

With its rising tally of unflattering trade practices ranging from unsafe toy production to negligence of intellectual property rights, China’s impulse to shake its finger at protectionism to save face comes as no surprise. US Commerce Secretary Carlos Gutierrez called-out Chinese trade malpractices during USSED III as he beckoned, “I would have to assume that the brand ‘China’ is very important to the Chinese.”

Warning notes were sounded as Chinese Vice Premier Wu Yi cautioned, “There have been some disharmonious notes in China-US relations this year. The inclination to politicise (trade) issues has increased. . . Trade restrictions, and protectionist measures, can only hurt both sides”

Optimists maintain that US-China trade relations will find common ground in opportunities to honor their commitments to reducing greenhouse gas emissions and energy use for economic output. As Henry Paulson, Secretary of the Treasury projects, “The environment is an area that is “easier to cooperate on. It’s something the Chinese have common ground with members of Congress on.”