Wednesday, July 4, 2007

A Not-So-Fruitful Sino-US Strategic Economic Dialogue

The Second round of Sino-US Strategic Economic Dialogue, which took place in May 21st 2007, was considered by many as less constructive than expected. During the two-day meeting, China agreed to the followings: additional air carriers over the Chinese territory by 2010, rights for US banks to issue credit cards in China, raised investment limit for eligible international organizations and further negotiations over the issues of Chinese tourism to the US. Nevertheless, both sides failed to address controversial issues. Although the US was extremely concerned with China’s heavy-handed control over its exchange rate, which put US at a disadvantage, the Dialogue ended without touching the issue. The US also failed to obtain China’s commitment to comply with the World Trade Organization (WTO) as well as Intellectual Property Rights (IPR) rules.

Given China’s efforts to curry US favor before the Dialogue, it seems puzzling that the Dialogue did not yield any groundbreaking outcomes. The US has gained about 326 billion USD thanks to the lavish purchases as well as the investment agreements signed by the China Council for the Promotion of International Trade. To further show its commitment to cooperation, China even let the value of renminbi against the USD to change from 3:1000 to 5:1000. China’s efforts, however, were dwarfed by the 3000 billion dollars deficits that the US has suffered every year. Likewise, the 0.5% renminbi adjustment is nothing compared to the 40% renminbi devaluation and the subsequent economic losses that the US experienced. To the US, then, these efforts did little to facilitate bilateral cooperation.

A closer examination also shows that the US did not view the Dialogue as the same as China did, which explains the disappointing outcomes. The US intended to focus on broad-term issues, such as market liberalization and bilateral trade imbalance. Therefore, it saw Chinese concessions on tourism, direct flights and finance-related issues as attempts to dodge those problems. China’s responses, nevertheless, reinforced US suspicion over China’s commitment to overcome those problems. Such inconsistent focus not only failed to ameliorate but actually furthered the tension between these two countries. Unless China is engaged in comprehensive reforms, it seems unlikely for both US and China to reopen the Dialogue before the end of this year.

Contrary to what the title of the Dialogue indicates, the content and agenda reveal the economic nature of the Dialogues. In other words, both the US and China used those opportunities to address trade-related rather than security-oriented issues. The Dialogues allowed the US to organize, express and hopefully pacify complaints from US business and other interest groups. However, China’s goal differed: it had hoped to use those Dialogues to show Chinese resolve against US pressure, which will serve to deter future pressures from other economic partners.

The outcomes of this Dialogue will have great impact on future Sino-US relations. The US will have little incentives to start a third round of talk, since it suspected China’s commitment to solving bilateral problems. With Presidential election approaching, the current Bush administration would rather play safe than engaging in moves that invite future Democratic attacks. In the absence of US pressure, it is also unlikely for China to initiate another Dialogue.

Many observers liken the Sino-US economic tension to the US-Japan trade frictions in 1990s and argue that the former will disappear with time. However, such comparison is erroneous because Japan and China are fundamentally different. It is true that Japan and the US have experienced major economic frictions in 1990s, but it is important to recognize that the relations were helped by common democratic structures as well as security alliance. China not only differs from the US in terms of its political structures, it is also a potential security threat to the US—American economists like Bergstan even believed that China is intentionally trying to diminish American influence in the Asia-Pacific region. Therefore, it would be nearly impossible for both countries to achieve amicable cooperation if the root of the tension is not addressed.

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