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Second US-China Strategic Economic Dialogue: A Matter of Pace

The pace of change, not the nature or viability of change, dominated discussions during the second US–China Strategic Economic Dialogue (SED), held on May 22 and 23, 2007, in Washington, D.C.

As expected, the perceived trade imbalance between the United States and China, renminbi currency revaluation and intellectual property rights protection in China again topped the dialogue’s agenda. But while there was broad agreement on the nature of the concerns addressed, agreement was not reached on the timing.

Chinese Vice-Premier Wu Yi and US Treasury Secretary Henry M. Paulson co-chaired the discussion, which was attended by ministerial-level officials from both sides.

At issue in the dialogue was a different valuation of the trade imbalance between the two sides. The US side blamed it mainly on China’s undervalued currency, urging China to take quick actions. In response, the Chinese side maintained that the real problem is more complicated than perceived, requiring patience from both sides.

Despite the continuous appreciation of China’s currency since China’s foreign exchange reform in 2005, the United States is still pushing for much faster growth in the renminbi’s value, based on a claim that the renminbi (also called the yuan) is undervalued by about 40 percent, giving Chinese manufacturers an advantage in the US market over US manufacturers.

Prior to the beginning of discussions, Wu was presented with a letter from US congressmen calling for a bigger revaluation of the renminbi that they said would alleviate the trade imbalance between the two sides; they threatened US sanctions if the US government’s efforts fail. Paulson, in his opening remarks at the SED, urged China to take prompt actions to redress “persistent trade and financial imbalances,” saying Americans were “impatient.”

Paulson told Wu, “Our policy disagreements are not about the direction of change but about the pace of change.”

Wu said attempts to pressure China to carry out a significant revaluation of the renminbi would not be helpful and could jeopardize the interests of the two countries.

She said China is willing to promote currency flexibility, but she said it will keep the renminbi “basically stable at a reasonable, balanced level.”

She also warned, “Politicizing trade and economic issues is absolutely unacceptable” and would “complicate the situation.” 

Since China’s July 2005 forex reform, the Chinese currency has appreciated by more than 7 percent. China widened the floating band of the renminbi against US dollar for daily spot trading on the inter-bank market from 0.3 percent to 0.5 percent in the week prior to the SED. On May 21, the exchange rate between US dollar and the renminbi increased to a new record high of 7.6652 yuan per dollar (from 8.28 yuan per dollar in July 2005).

Aside from resisting the pressure on a substantial renminbi appreciation, Wu said that the huge trade imbalance also stems from US restrictions on its exports to China, especially high-tech products, which have the highest competitive advantage in US exports.

The US administration has been adopting a strict export-control policy on high-tech exports to China for “security reasons,” which has hindered China's imports from the country. Washington drafted a new rule in July 2006, stipulating license requirements for additional items defined as “military end-use,” and making the procedure of applying for licenses more complicated.

Statistics indicate that in 2006, the United States furnished 9.1 percent of China's import of high-tech products, from 18.3 percent in 2001. Had the 2001 ratio been maintained, US exports to China would have increased in value by about US$70 billion.

China demonstrated its sincerity in addressing the trade imbalance issue by signing 138 purchasing and investment contracts or agreements worth of US$32.6 billion prior to the SED discussions. The contracts and agreements were concluded by the US and a Chinese Government delegation led by Vice-Minister of Commerce Ma Xiuhong. Although no breakthroughs were reported on major differences at the SED, various agreements concerning sectors such as civil aviation and financial services were reached.

US airlines will fly to China more often because of the agreements, to 23 flights per day in 2012, up from 10 today. Limits on total cargo flights and carriers will also be lifted by 2011.

China has agreed to resume allowing overseas market players to set up joint venture securities firms. It will also allow international firms to expand from investment banking to brokerage activities, principal investment and assets management businesses later in 2007.

However, law makers in the United States seem to want more. Following the SED and a meeting between US congressmen and the Chinese delegation, House Ways and Means Committee Chairman Charles Rangel announced that the committee he chairs will draft a sanctions bill to press for further currency appreciation by imposing high tariffs on China. The Senate Banking Committee also expressed its intention to pass a new bill allowing higher tariffs on specific Chinese products.