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Making Progress at the U.S.-China S&ED: Go Strategic or Stay Home

by Elizabeth C. Economy
July 1, 2014

(L-R) Chinese State Councilor Yang Jiechi, U.S. Secretary of State John Kerry, Chinese Vice Premier Wang Yang and U.S. Treasury Secretary Jack Lew leave after the U.S.-China Strategic and Economic Dialogue (S&ED) Joint Opening Session at the State Department in Washington July 10, 2013. (L-R) Chinese state councilor Yang Jiechi, U.S. secretary of state John Kerry, Chinese vice premier Wang Yang and U.S. treasury secretary Jack Lew leave after the U.S.-China Strategic and Economic Dialogue (S&ED) Joint Opening Session at the State Department in Washington on July 10, 2013. (Yuri Gripas/Courtesy Reuters)

As the full contingent of U.S. cabinet secretaries, other senior officials, and support staff prepare for the sixth round of the U.S.-China Strategic and Economic Dialogue (S&ED) (to be held on July 9-10 in Beijing), it is not unreasonable to ask whether all the fuss and muss is worth it. Despite all the focus on this bilateral relationship, it often appears that for every problem addressed, ten more mushroom in its place. In the weeks leading up to the S&ED, a plaintive cry can be heard emanating from DC: Are we getting it right? What more can we do? I have two answers in response: batten down the hatches and get ready for the long haul; or stay home.

In an effort to be more constructive, let me focus on the first idea. The U.S. agenda with China is long, very long. At this point, there is nary a bilateral or multilateral issue that could not benefit from some cooperation between the two countries. So, how might the United States best structure a constructive dialogue? Let’s begin where U.S. and Chinese interests overlap—at least a little bit: trade and investment.

There is some good news. The U.S.-China economic relationship is one of the world’s most robust. They are each other’s second-largest trading partners: overall trade in goods in 2013 expanded to $562.2 billion from $536.1 billion in 2012. The U.S. trade deficit with China increased as well, but only from $315 billion to $318 billion, reflecting a 10.4 percent increase in exports from the United States to China and a 3.5 percent increase in exports from China to the United States. According to the Rhodium group, Chinese foreign direct investment in the United States more than doubled from $6.5 billion to $14 billion (largely on the back of the $7.1 billion Shuanghui takeover of Smithfield), reflecting another potentially positive trend.

Yet significant challenges remain. Progress in reducing barriers to trade and investment in China are not moving as rapidly as many in the United States would like. In addition, a 2013 report issued by a private commission headed by former U.S. ambassador to China Jon Huntsman and former director of national intelligence Dennis Blair suggests that China is responsible for 50 to 80 percent of the estimated $300 billion in losses from intellectual property theft to the American economy. And Beijing’s initial steps to reform its currency policy have not been followed by additional moves to improve transparency or limit government intervention.

Not unsurprisingly, much of the Obama administration’s effort with China is dedicated to trying to make progress on these individual issues—from intellectual property theft to greater access for U.S. services to currency manipulation. Instead of an issue-by-issue agenda, however, more useful would be to develop a comprehensive trade and investment framework within which to secure the bilateral economic relationship. This would involve the negotiation of a bilateral investment treaty (BIT)—currently in its infancy—and further down the line, a free trade agreement (FTA). Both would offer the opportunity to negotiate across sectors of the economy, allowing a give and take that isn’t available when pushing on single issues.

To get the process started, Chinese president Xi Jinping and U.S. president Barack Obama should make the case for greater economic engagement publicly to their respective citizenries, business communities, and other relevant officials. Both countries are mired in negative narratives: the Chinese claim that the United States seeks to contain their country, and Americans argue that China simply steals from the United States that which it cannot create itself. Real leadership is needed to get the bilateral trade and economic relationship moving forward.

The sixth round of the S&ED could also establish a bilateral working group to assess the viability of an FTA. By one estimate, had the United States and China established an FTA in 2010 and reduced tariffs by 10 percent, the U.S. economy would have grown an additional .45 percent in 2011. Working toward a bilateral FTA could also lay the groundwork for China’s eventual accession to the Trans-Pacific Partnership, a prospect in which many Chinese officials are increasingly interested.

Finally, the United States should take advantage of other countries’ efforts to negotiate trade and investment deals with China to coordinate policy initiatives. The European Union is also in the initial stages of negotiating a BIT with China. Finding common ground with the EU will enhance the negotiating strength of both the United States and the EU and prevent China from playing one off the other.

There is an alternative to the long-haul painful process of negotiating a new economic framework with China—staying home. If the two countries can’t get on board with a significant enough strategic plan to merit hundreds of officials flying across the Pacific, they should wait until they can. It need not be seen as a failure—both countries could tout it as another form of cooperation: reducing their collective carbon footprint.

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