EVENTS

Date:	Monday, April 17, 2006
Time:	4:00 PM -- 6:00 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

April 2006

President Hu Comes to Washington: Setting the Agenda for U.S.-Chinese Relations

On April 20, Hu Jintao will visit Washington, D.C., for the first time since becoming president of the People’s Republic of China three years ago. Although diplomats from both China and the United States are rushing to wrap up bilateral agreements in advance of President Hu’s visit, the relationship with China remains beset by a broad range of economic and security challenges. How should we rate the progress of U.S.-Chinese relations? What should President Bush try to accomplish with China during his remaining time in office? How should the administration balance its economic and security concerns in its relationship with China? On April 17, AEI held a panel discussion on President Hu’s visit to Washington.

Phillip L. Swagel
AEI

There is a need to focus the conversation on economic relations between the United States and China. There are several distractions that are secondary to both U.S.-Chinese economic relations and the American economy.

Chief among these is the discussion about the exchange rate. By saying that the Chinese currency is undervalued, one is arguing by default that Chinese monetary policy is too loose or overly expansionary. Many think American fiscal policy has been too loose over recent years; however, no one has suggested that these matters be taken to the World Trade Organization (WTO), though the same has been suggested as a resolution to the Chinese exchange rate. While the exchange rates do matter, particularly to certain sectors of the U.S. economy, they do not matter as much as most people think they do.

In addition, the United States derives substantial benefits from China’s loose monetary policy, including low cost consumer goods and China’s overpayment for U.S. Treasury bonds. Recent moves do indicate that the Chinese are getting ready to float more, while citizens’ private funds going overseas and likely providing business for major U.S. financial firms should prove a counterbalance.

Trade benefits all parties involved, so both the United States and China are benefiting from the current relationship. China is probably benefiting more, but that has more to do with convergence, as China started substantially behind the United States in terms of economic and technological development.

There are several issues that need to be the focus of the economic conversation. The first is technical assistance. The Chinese have a lot to learn about economic and social policy, and the United States should offer to help China make good domestic policy decisions.

The second is intellectual property. While China is not the only country to “steal” from the United States, China’s level of theft is immense and pervasive.

Energy is a joint interest, but Chinese growth has tightened world energy markets, directly affecting the U.S. market. China needs to become more capital intensive and less reliant on the worker, ultimately aiming to reduce pollution and energy consumption. On this front, the United States can work on the technological frontier, promoting more energy efficient technologies.

Trade barriers on both sides should be addressed.

Conflict is not inevitable with China’s rise, but it is important that the United States continues to push China toward democracy. Economic tools are an important part of this, as prosperity and liberty go hand in hand.

Nicholas Lardy
Institute for International Economics

There are substantial saving-investment imbalances. The United States saves less and consumes more than probably any other country, while the Chinese consume less and save more, with the consumption share of GDP declining substantially over recent years. Chinese household savings rates are about 25 percent of disposable income, while in the United States they hit an all-time low last year at -1 percent. The United States is the largest current account deficit country, while China last year had the world’s second largest current account surplus and is likely to have the biggest surplus this year.

The Chinese are beginning to work toward domestic consumption-driven growth, as while their current growth is strong, the leadership recognizes it may not be sustainable. Currently, the Chinese economy is facing growing inefficiencies and excess goods that are not sold. The Chinese government also recognizes that they have increasing severe environmental problems, caused by their capital-intensive, investment-driven growth path. Current Chinese growth is also largely dependent on the amassing of trade surpluses and current account surpluses, with last year’s trade surplus probably accounting for one-third of its GDP growth. The Chinese Central Bank recognizes that this is not sustainable but is likely to cause protectionist stances abroad.

This strategy is good one for China; it will be less energy intensive and environmentally detrimental, more sustainable in the long run, and better for the global economy. However, China does face some large challenges to moving in this direction.

First, the standard way of promoting consumption is to cut taxes. China’s taxes are only about 1 percent of GDP, so direct tax cuts on personal income are not going to be a very powerful instrument for getting people to consume more.

The second option is for the government to spend more on things like health care, pensions, and education. They are doing a bit of that and are hoping to give people a sense that the social safety net that has been so severely eroded under the reform program is functioning. One of the major reasons why the savings rate is so high is that people are concerned by the lack of a social safety net.

While China is talking a lot about consumption-driven growth, if one looks at what is happening, not much is going on to promote this. There have been some tax cuts, but that will not have a major effect. Government expenditures have increased slightly, but not enough to really make a difference. Interest rates have remained too low. The policy steps that need to be taken to lead to this desirable outcome are not being implemented, and China is likely to continue to have large current account surpluses.

Randall Schriver
Armitage Associates

There are numerous security issues that should be addressed in this week’s meeting; however, there is likely to be progress made on very few, in any.

North Korea is likely to be discussed, but the six parties seem to have reached an uncomfortable equilibrium with two major groups, the U.S.-Japanese camp and the Chinese-South Korean camp, which advocates positive inducements, rather than sanctions. The reality is that sanctions cannot be effective if the five parties cannot agree on a strategy. However, the Chinese and South Koreans can continue to give North Korea aid and other positive inducements without any real detriment to their strategies. North Korea understands this stalemate and therefore has very little incentive to do anything about its nuclear program. The United States is likely to ask the Chinese to use more of their leverage to force the North Koreans to act, and the Chinese are likely to respond by asking the United States to address some of North Korea’s concerns, resulting in no real progress.

Iran is likely to be an issue of equal priority to the United States. While this could have been an issue that brought the two nations closer, given the statements of Iran’s government these past few weeks, the Chinese government has made it clear that it does not support sanctions or other action against Iran.

Taiwan is likely to be at the top of China’s list of concerns. The Chinese made a good diplomatic move by inviting 200 businessmen to Beijing this past week, sending a signal to the United States that they have a plan in how they hope to deal with Taiwan. The real debate about Taiwan’s future is not being played out between Beijing and Washington, but rather in Taiwan amongst the Taiwanese people.

South Asia is an area that will probably get some attention. The nuclear deal with India has raised some questions about U.S. strategy in Asia, and the Chinese are likely to ask the United States about the deal. The United States is likely to question China’s arms trade with Pakistan. This area is very important to both sides, and Indio-Pakistan tensions could have negative effects on both the United States and China.

Energy security is likely to be touched on in both the economic and geopolitical contexts. It is important that this be dealt with directly to avoid possibilities of future conflict.

Beyond that, issues addressed will likely included trade, human rights and religious freedom, environmental issues, health issues, and global issues. There is not a lot of time to address all of these issues, and in the end, security issues are not likely to be a major focus.

The history of U.S.-Chinese relations seems to have periods of crises, followed by periods of rebuilding. During the periods of rebuilding, both parties are always enthusiastic about the potential of the relationship, but ultimately the constraints of the relationship are eventually realized. The period of rebuilding after the collision of a U.S. EP3 spy plane and a Chinese fighter jet and after 9/11 is ending, and it seems that a period of tense relations is beginning because it is clear the interests of both parties diverge on some critical issues.

China now has the opportunity to demonstrate that it is serious about becoming a responsible stakeholder. The United States certainly needs a plan B though, in case China is not up to the challenge. There are domestic challenges in both countries that could impact both countries’ abilities to address these issues, because they are simply not the biggest priorities. The fact that this is an election year in the United States is also likely to cause stronger words toward China than probably would have been said if the meetings had been held earlier, as originally planned.

Dan Blumenthal
AEI

China is concerned about domestic economic issues, but that does not mean that China is focused inward. Energy policy has placed China all over the world, and its desire to continue to fuel economic growth has forced China to be outward looking.

China’s military openly patrols the Pacific and monitors American naval movements to the notice of both Japan and Taiwan. This is certainly not a sign of a nation focused inward. China is looking at the future in a strategic sense, and its military capabilities are playing a large role in its planning. It is difficult to separate the domestic issues from China’s foreign policy, since both play large roles in overall policy formation.

China is no different from other countries that have risen to power in the past. Historically such rises are rarely peaceful. The Chinese have gained greater capabilities in terms of military power, and it is important for the United States to try to figure out what their intentions are from the signals they send. China is building up its military with the seeming intention of using it. It is wrongheaded to believe that China’s rise is substantially different than most others historically.

There are two pillars to U.S. policy in China. The first is that China is welcome in the world system, but it must be accountable for irresponsible behavior domestically and internationally. The United States is also talking openly about hedged engagement with China, as it is very concerned about China and the different directions in which China could go. The United States is currently working to try to rebalance the power in Asia by improving defense relationships in Asia and moving resources into Asia.

The question is whether these two pillars can be reconciled. They can, but the United States cannot force China to become accountable--that will require similar demands from other responsible stakeholders in the world. For example, Iran is likely to be the primary security issue discussed. China is benefiting substantially from the energy deals it is making in Iran, where other countries cannot, but it is letting other nations do the difficult work in terms of denuclearizing Iran. All the countries in the world concerned about Iran’s nuclear program should also be pressuring China to be a reasonable stakeholder, rather than allowing it to continue to benefit from Iran’s resources and not support any sanctions or action.

China is also doing hedging of its own. It is forming alliances in Asia and is particularly fond of regional groups that do not include the United States. There will also be continued moves to protect Chinese energy resources abroad. In reality, every hedging move by the United States is likely to produce a counter-move by China.

AEI researcher Anne Siarnacki prepared this summary.