The Obama Administration has a new China policy, or at the very least has gotten better at articulating it. In preparation for President Hu Jintao’s January 19 State visit, key officials in the Obama Administration outlined their goals for the U.S.-China relationship through a series of speeches last week. 

While Secretaries Tim Geithner and Gary Locke each focused on specifics (currency, market access, intellectual property), Secretary of State Hilary Clinton’s speech on Friday (click here for speech transcript) provided a new framework by which to view the U.S.-China relationship. Rest assured this isn’t the same soft China policy that accompanied President Obama on his visit to China in November 2009. 

In her speech, Clinton acknowledged the importance of the U.S.-China relationship to each country and the world at large. But while it values its relationship with China, the United States still has choices and the U.S. would “firmly and decisively” address its differences with China. Friday’s speech, which was also the inaugural Richard C. Holbrooke Annual Lecture, in honor of former State Department official and an important peace envoy (key player in the Dayton Peace Accords and envoy to Afghanistan), has already received criticism from China’s leadership.  

Clinton Announces a New Paradigm By Which to View China’s Rise

Perhaps the greatest obstacles in the relationship – at least for the U.S. – have been China’s currency manipulation and China’s protection of domestic industries at the expense of international trade rules and norms.  What the U.S. asks of China – to stop pegging its currency to the U.S. dollar and to open its markets to foreign competition in accordance with international standards – inevitably means that in the short-term, Chinese domestic companies will suffer.  By allowing its currency to float, Chinese exports will become more expensive, hurting the manufacturing backbone of its economy.  Opening its markets to more competition from foreign companies and products – particularly the government procurement market – could impair the development of many of China’s nascent industries. 

Needless to say, it has been difficult to find a convincing argument to make Chian’s leaders willing suffer short-term hurt. In the past, U.S. officials have repeatedly discussed how in the long-run these changes will eventually better promote China’s economic growth and power. But this appear disingenuous since in the short-term, it is the U.S. that will most greatly benefit from changes to Beijing’s current policies.  Additionally, telling Beijing what’s good for it in the long-run is sort of like parents telling their kids what is best. 

But Clinton’s speech took on a decidedly different approach and offers a more convincing, even slightly threatening argument.  Clinton did not bother with a “what is best for China” argument to try to convince the Chinese government; instead Clinton provided an entire new way by which to view China’s rise.  Clinton acknowledged the hard work of China’s people and the far-sightedness of its leaders in creating the world’s second largest economy in just over 30 years.  But Clinton also stressed the important role the United States played in China’s rise; without the United States, which guaranteed military security in Asia and equitable rules to govern the global economy, China’s current success would have been impossible.  

By tying China’s rise to the stability the United States provided in the region for the past 30 years, Clinton makes a much stronger argument as to why China’s leaders should make some changes on currency and market access – basically, these are the rules of the game that allowed you to succeed and now you think you can just change them? 

No rest for Robert Gates

The United States Will Remain a Pacific Power

But if logic isn’t enough to better protect U.S.’ interests, Clinton put China on warning that it is not the only fish in the sea.  Repudiating any notion of a G-2 relationship, Clinton gave a shout out to the other countries in the region, stating that the United States intends to remain a Pacific military power, strengthen its bonds with its allies in the region (e.g. Japan, South Korea, Philippines) and deepen its ties with developing Asian countries (e.g. India, Vietnam, Indonesia).

On some level, this should not come as a surprise to China.  This past summer, the United States involved itself in a long-running dispute between China and Vietnam over the control of a group of rock islands, stating that the U.S. has a national interest in mediating the dispute.  Additionally, recent bellicose developments on the Korean peninsula and China’s ambivalent response to the North’s unprovoked attack on South Korea, makes it apparent that the United States must maintain a strong military presence in the region.  China’s response shows that it is not yet ready to take on the responsibility of maintaining peace in the Pacific region since its loyalties to North Korea still dominate. 

Finally, Clinton noted that China’s non-transparent military build-up leaves one wondering what exactly are China’s intentions.  Military-to-military ties between the

 United States and China are at all-time low, mostly at the fault of China.  China’s military continues to shroud itself in secrecy and the recent visit of Secretary Robert Gates to China was a complete debacle.  While Gates visited with President Hu Jintao in Beijing, the People’s Liberation Army (PLA) tested – in a very public way – its own stealth fighter jet.  Hu’s admission that he was unaware of the PLA’s planned test fight, is not particularly reassuring.  Not only does the PLA continue its secrative military build-up, but it’s even a secret to China’s own President, making one wonder, what power does Hu still have?  If history is a guide, whoever is in charge of the Chinese military is in charge of China.  If not Hu, then who?

Getting Serious About Human Rights

Clinton was surprisingly blunt when it came to China’s human rights record and didn’t just portray human rights as a peculiar aspect of the American culture (see President Obama’s talk to Shanghai students in November 2009 for this approach).  Instead, Clinton emphasized the universality of certain human rights and highlighted the fact that China is a signatory to many United Nations human rights treaties.  The United States is not interfering with China’s domestic politics; instead the United States is merely requesting that China fulfill its human rights obligations, obligations it voluntary agreed to. 

But Clinton went further and mentioned specific dissidents, including the recent Nobel Peace Prize winner, Liu Xiaobo who is currently languishing in a Chinese prison; rights defending attorney Chen Guangcheng who since his release from prison has been subject to repeat police harassment; and missing rights defending attorney Gao Zhisheng.   Clinton stressed that as long as people like these three continue to advocate peacefully within the confines of the law, China should not persecute them.  Clinton poetically commented that the empty seat for Liu Xiaobo at last month’s Nobel Peace Prize ceremony symbolizes China’s unrealized potential.  Clinton stressed that these human rights are necessary to China’s success; freedom of speech is essential to fostering free thought that leads to technological and scientific advancement and a vibrant civil society addresses social-economic problems that are currently one the regime’s biggest fears. 

The Obama Administration has a new policy on China – it’s tougher, more logical and stresses the importance of human rights.  The Chinese government has already responded.  President Hu Jintao, in an interview with the Washington Post, commented that the United States should not interfere with the internal affairs of China. 

Wednesday’s meeting between Presidents Hu and Obama should prove to be perhaps some of the most important conversations in the U.S.-China relationship since Kissinger secretly visited Beijing in 1971 in preparation for President Nixon’s visit.

I used to think I was the only one who noticed the huge, weird, angry sign “Trenton Makes the World Takes” plastered on the Delaware Bridge just outside the New Jersey city of Trenton.  So imagine my surprise when this slogan was featured in Commerce Secretary Gary Locke’s speech about U.S.-China relations before the U.S.-China Business Council (USCBC) on Thursday.  For Locke, the manufacturing center of Trenton during the early 20^th Century is China today; it’s China that now makes and the world takes.

But the status quo must change Locke argued.  While noting some successful U.S.-China commercial relations, Locke raised the issue of market access in China, particularly in light of China’s indigenous innovation policies and its lax protection of intellectual property (which makes one wonder why didn’t he continue to play with the Trenton theme and say “China makes AND takes”; that would have elicited laughs from the USCBC for sure),  Between Locke’s speech, reprinted below, and Treasury Secretary Tim Geithner’s speech Wednesday, there is some serious saber-rattling coming from the American delegation in preparation of President Hu Jintao’s State visit next week.

Commerce Secretary Gary Locke Delivers Policy Speech

on U.S.-China Commercial Relations

Thank you John, for that kind introduction.  And thank you for having me here today.

We are today less than a week away from an important State visit by Chinese President Hu Jintao.

More than two decades ago, on my first trip to mainland China, I could not imagine that the U.S.-China relationship would eventually become so consequential.

Nor could I have imagined a scene like we witnessed a few days ago: Defense Secretary Gates joining together with his Chinese counterpart to stress the need for stronger military ties between China and the United States.

In 1989, I came in from Shanghai’s airport on a rickety, Russian-made bus, and stepped into that city’s dimly lit streets into a world very different than the one I left in the U.S.

There were swarms of bicycles – young men with their dates balanced on handlebars, grandparents pedaling to the market, boys and girls with white-knuckle grips on their parents’ shoulders. Bikes everywhere.

Shanghai then was a gritty, industrial city filled with low-rise buildings.

There were no skyscrapers. Few cars.

There was little sign of what was to come.

Today, Shanghai’s skyline is dotted by more than 400 skyscrapers.  Go to the Shanghai World Financial Center – one of the tallest buildings in the world – and you can stay at a Park Hyatt Hotel with a lobby on the 79^th floor.

Those bike paths I saw on my first visit have been replaced by elevated freeways shuttling people and commerce at a frenetic pace.

To see it is to be awed, and I am every time I go back to China.

The explosive growth in places like Shanghai has helped lift almost 200 million people out of poverty.  In the years ahead, hundreds of millions more Chinese citizens will join the middle class.

The United States welcomes this growth, because it’s good for the people of China; it’s good for the global economy; and it’s important for U.S. companies who offer world-class products and service, products and services that can improve the quality of life for the Chinese, while providing jobs for American workers back home.

With the U.S.-China Business Council’s help, this has become perhaps the most important bilateral trading relationship in the world.

China is the top destination for American exports, behind just Canada and Mexico.  And America is the number one national market for Chinese exports.

In the past 20 years, U.S. exports to China have increased by a factor of 12; imports from China have increased more than 30-fold.

However, we are at a turning point in the U.S.-China economic partnership.  Last year, China became the second largest economy in the world.  And the policies and practices that have shaped our relations over the past few decades will not suffice over the next few decades.

So today, I’d like to talk a bit about how we can move forward and ensure that we can unlock the full potential of the U.S.-China commercial relationship in the early 21^st century.

The gross trade imbalances between our countries are a good place to start, because they have the potential to threaten global stability and prosperity.

And I think a great illustration of that can be found in, of all places, Trenton, New Jersey.

Many of you have likely taken Amtrak up to New York, and when you pass by the Delaware River in New Jersey, you see that famous sign: Trenton Makes and the World Takes.

Well, replace Trenton with China, and you have a simplistic, but pretty accurate description of the global economy over the last few decades.

China and the United States benefited tremendously from this arrangement in recent years.

American consumers got an impressive array of low-cost goods.  And in its transition into one of the world’s top exporters, China was able to lift millions of its citizens into a fast-growing middle class.

But it’s not sustainable.  The debt-fueled consumption binge in developed countries like America is over.

And countries like China are beginning to realize that there are limits to purely export-driven growth.

That’s why we need a more equitable commercial relationship.  And it is within our reach.

The United States is doing its part to facilitate global adjustments by increasing private savings and exports, as well as taking steps to bring down its long-term fiscal deficits to a sustainable level.

And the Chinese leadership is making the rebalancing of its economy one of the cornerstones of its forthcoming five-year plan.

China is aiming to promote domestic consumption through a variety of measures, such as boosting the minimum wage for its workers and building an improved social safety net. Changes like these will hasten the rise of a middle class that wants the same cars, appliances, fashion, medical care and other amenities that have long been enjoyed by consumers in the Western world.

The Chinese government is also putting an intensive focus on strategic emerging industries, with more high-value work in areas like healthcare, energy and high technology.

And the Chinese have signaled that they want foreign businesses to help develop these sectors by entering joint ventures and by conducting more research and development in China.

This is assistance that U.S. companies are eager to provide, so long as China deals meaningfully with concerns about intellectual property protection, as well as a variety of other issues I will talk about later.

Such cooperative projects can serve as the foundation for a stronger economic relationship between China and the U.S.

But China’s long-term success at addressing the concerns of international businesses will help determine whether it realizes its economic vision – a vision in which China is a leader in innovation and a producer of higher-value goods and services.

Here’s the good news: we are already seeing examples of just how this future could play out, as our businesses and our governments collaborate to tackle some of the world’s greatest challenges.

Just look at what’s happening with the new Energy Cooperation Program that Secretary Chu and I announced while in China in October 2009 to promote more collaboration between Chinese and American companies on energy issues.  One of the founding corporate members of the program, Boeing, is partnering with Air China and Petro China to research a new generation of aviation biofuels that don’t rely on food crops.

If this venture is successful, it could reduce the carbon footprint of airplane travel, and avoid the negative impact that other biofuels have on the global food supply.

Or look at what’s happening with Duke Energy, one of America’s leading utilities, which has signed an agreement for joint research with China’s largest energy company, Huaneng, and with the Chinese government’s Thermal Power Research Institute.

Today, there are scientists and researchers shuttling between the companies and the research institute, working to develop cutting-edge solutions for cleaner-burning coal and carbon sequestration.

The Chinese and American governments are also working together on a variety of transportation issues, including how to spur the deployment of more high-speed rail.  China has embraced high-speed rail and has developed its infrastructure at a tremendous rate.  Starting from scratch, China has constructed and put into service over 4,000 miles of high-speed routes in the last decade – making China’s the longest high-speed rail network in the world.

In meetings last year, officials and experts from the Department of Transportation and China’s Railway Ministry met in Cambridge, Massachusetts, to share information on the development of high-speed rail standards.  And at the state level, the Chinese government has signed cooperation agreements with the State of California on its high-speed rail project to link Anaheim and San Francisco.

There is, however, a sobering side to U.S.-China commercial relations: For every story like Duke Energy’s or Boeing’s, there are many more that are never written.

When I talk to business leaders across America, they continue to express significant concerns – shared by business around the world –about the commercial environment in China – especially China’s lax intellectual property protection and enforcement, lack of transparency in government decision-making and numerous indigenous innovation policies that often preclude foreign companies from vying for Chinese government contracts.  These policies mandate that products must be made, conceived and designed in China.

It’s important to note that since China formally joined the WTO nine years ago, it has made important progress opening its market.  Tariffs have come down, private property rights are steadily evolving and great strides have been made to free the flow of commerce across China’s borders.

On balance, the competitive playing field in China is fairer to foreign firms that it was a decade ago.  And we commend the Chinese for that.

It is also not lost on countries in the West that on our march towards industrialization, we sometimes protected native industries with policies that today would mobilize an army of WTO lawyers in opposition.

But those policies were folly then, and they are surely folly now.  After World War II, the United States and a growing community of nations painstakingly built a global trading system based on the freer flow of goods, ideas and services across borders.

And the creation of the World Trade Organization in 1995 ensured that countries would be held accountable for their commitments to open markets and lower barriers.

China has benefited tremendously from this international trading system, especially since it joined the WTO in 2001.  The United States and other foreign nations have every right to seek more meaningful commitment and progress from China in implementing the market-opening policies it agreed to when it joined the WTO.

From our experience, there are usually five things that need to happen to turn these promises into reality.

It starts with the easiest step: a statement of principle from Chinese officials that action will be taken to solve a market access issue.

Next, that agreement has to be codified into binding law or regulations.

Third, the law or regulation needs to be faithfully implemented by the central government.

And fourth, it needs to be implemented at the local and provincial levels.

Only after all these things have happened can you arrive at the fifth, final and most important step, which is where this new law or regulation becomes a norm – an accepted way of doing business in China’s commercial culture.

When it comes to indigenous innovation, intellectual property or a variety of other market-access issues, an enduring frustration is that in too many cases only the earliest steps are taken, but not all five.

Perhaps an agreement is made, but it never becomes binding.  Or perhaps there’s a well-written law or regulation at the national level, but there’s lax enforcement at the provincial or city level.

A few weeks ago, the Commerce Department and the office of the U.S. Trade Representative welcomed Vice Premier Wang Qishan and other leading Chinese officials for the 21st Joint Commission on Commerce and Trade, where we worked through a variety of specific trade issues.

It was a productive meeting.  Vice Premier Wang and his team were responsive to our concerns and they pledged action in a variety of areas critical to American businesses.

They agreed to remove administrative and regulatory barriers discriminating against American companies selling everything from industrial machinery and telecom devices; to those that restrict U.S. participation in the development of large-scale wind farms in China.

They also agreed to revise one of their major government procurement catalogues to ensure a level playing field for foreign suppliers and to reduce the use of counterfeit software in government offices and state-owned enterprises.

Additionally, Vice Premier Wang asked the Commerce Department and the U.S. Trade Representative to partner with him on a public campaign to reduce intellectual property rights violations in China, which he is leading.

The American government welcomes these commitments from China.

But to be clear, they are only a first step.  What was agreed to at the JCCT were important statements of principle and policy – but they must be turned into concrete action with results.

Take last year’s JCCT, when the Chinese agreed to remove a local content requirement for wind turbine suppliers – a positive step forward.

But soon after, China’s government employed a rule that required foreign businesses seeking to build large scale wind farms in China to have prior experience with such projects in China.  The rule might have been different than the local content requirement, but it had the same effect – making it tougher for foreign companies to compete with China’s domestic companies.

At this year’s JCCT, we persuaded the Chinese to modify that rule as well.

Or look at the issue of intellectual property. We have heard Chinese leaders condemn IP-theft in the strongest terms, and we’ve seen central government laws and regulations written or amended to reflect that sentiment.

But American and other foreign companies, in industries ranging from pharmaceuticals and biotechnology to entertainment, still lose billions of dollars from counterfeiting and IP-theft in China every year.

For example, in the United States, for every $1 in computer hardware sales there is about 88 cents in software sales.  But in China, for every dollar in hardware sales there is only eight cents in software sales.

According to the Business Software Alliance, that discrepancy is largely explained by the fact that nearly 80 percent of the software used on computers in China is counterfeit.

So America welcomes Vice Premier Wang’s pledge to accelerate China’s crackdown on intellectual property violations.  And China will have a very willing partner in this endeavor in the United States.  But we will be focused on meaningful outcomes.

I recognize I’m not the first foreign official to express concern over the commercial environment in China.  But it would be a mistake to portray this concern solely as U.S. self-interest masquerading as advice.

The Chinese economy is increasingly moving up the global economic value chain, where growth is created not just by the power of a country’s industrial might, but also by the power of its people’s ideas and their inventions.

In the long run, economies with poor intellectual property protections and inconsistent application of market access laws will lose out on generating great new ideas and technologies.  And they’ll lose out on the jobs that come with producing new products – jobs critical to an expanding middle class.

The damage won’t happen overnight.  I freely admit that companies and countries can gain short-term advantages from lax rules in the commercial space.

But over time, if innovators fear that their inventions or ideas will be stolen or discriminated against, one of two things will happen – they’ll either stop inventing, or they’ll decide to create or sell their inventions elsewhere.

Ultimately, all that the United States seeks is a level playing field for its companies, where the cost and quality of their products determines whether or not they win business.

That is the ideal we strive for in the United States.

And our commitment to open and competitive markets is a big reason why we remain the number one destination for foreign direct investment in the world.

We understand that China’s modernization and evolution towards a more market-oriented economy is a process that will take time.

China has 1.3 billion people.  Seven hundred million of them still live in rural areas; many with little electricity or running water.  It took the United States over 100 years to build the electrical transmission capacity it has today.

To meet the rising demands of its own consumers, China will have to build a similar amount of capacity in just 15 years.

These are enormous undertakings.  And it’s understandable if, in the past, China’s immediate development goals took precedence over other concerns.

With millions of Chinese coming in from the countryside looking for work, it isn’t necessarily an easy decision to close down a factory producing counterfeit goods, when that factory is providing badly needed jobs.

So what we’re discussing here are real and significant challenges. For market reforms to continue, it will take constant vigilance – not just from the United States, but from all countries and businesses around the world that benefit from rules-based trading.  And from Chinese business and government leaders, who themselves have a strong stake in ensuring that China is friendly to global innovation and international competition.

In front of us is the opportunity for China and the United States to lead the world economy in the early 21st century to create a new foundation for sustainable growth for years to come.

We can’t tell exactly what that future will look like.

But we can be certain that it will be a better future if the Chinese and American governments pursue cooperation over confrontation in the economic sphere.

Cooperation that will put millions of our people to work.

Cooperation that will develop technologies to solve the most pressing environmental, economic and social challenges facing the world today.

This is the great opportunity before China and the United States.  We just have to seize it.

Thank you.

###

In preparation for President Hu Jintao’s State visit next week, Secretary of the Treasury, Timothy Geithner, provided his thoughts on the future of the U.S.-China economic relationship at John Hopkins School of Advance International Studies (SAIS) on Wednesday, January 12.  While the speech provided the usual platitudes of a shared economic future, the tone was at times cautionary about the current state of the economic relationship.  Geithner spoke frankly of China’s barriers to market access and concerns over currency.  With Commerce Secretary Gary Locke and Secretary of State Hillary Clinton to each give their own speeches in the coming days, Hu’s State visit to the U.S. next week might not be the polite rhetoric of before.  See below for Geithner’s full comments.

Secretary of the Treasury Timothy F. Geithner

“The Path Ahead for the U.S.-China Economic Relationship”

Remarks As Prepared for Delivery

It’s a pleasure to be here at SAIS.

SAIS is a leader in one of the most important challenges in public policy and education – that of helping Americans understand the world and the role we play in it.  This is important because we cannot effectively pursue our national interests unless we understand the objectives, the intentions, and the capabilities of other nations.

Next week, President Obama will host President Hu Jintao at the White House.

This State Visit takes place at a time of important transition for the world economy, the Chinese economy, and the U.S. economy.

The global economy is emerging from the financial crisis, but that crisis has left lasting scars that will take years to repair.  And it has left a growing gap between the growth trajectories of the large developed economies and the rapidly growing emerging economies.

While many of the major economies are still confronted with the challenge of rebuilding after crisis, many of the emerging economies are at the early stage of what should be a long period of very rapid economic growth, with rising incomes creating growing demand for resources and for investment capital.

The growth of the United States stands between these two divergent paths.  We are likely to grow at about half the rate of the major emerging economies, but about twice the rate of Europe and Japan.

These dynamics will fundamentally change the balance in the world economy, forcing changes in the architecture of the trade and financial systems.

In this new global context, China’s principal economic challenge is how it will manage the next stage in its transition from a state-dominated developing economy, dependent on external demand and technology, to a more market-oriented economy, with growth powered by domestic demand and innovation.

Today, I want to talk about the implications of these changes for our economic relationship with China and for U.S. economic policy.

China presents enormous economic opportunities for the United States and for the world, but its size, the speed of its ascent, and its policies are a growing source of concern in the United States and in many other countries.

To put those concerns in context, I’d like to begin by stating a few fundamental propositions about our economic relationship.

First, the economic relationship between the United States and China provides tremendous benefits to both our nations.  Even though we compete in many areas, our economic strengths are largely complementary.

Second, China faces a very complicated set of challenges as it transitions toward a more open, market oriented economy.  It is very much in our interest that the Chinese manage these challenges successfully.

Third, our priorities in our economic relationship with China – from its exchange rate to its treatment of intellectual property – reflect changes that are fundamentally in China’s interest.  Ultimately, China will need to make these changes in order to promote its own long-term prosperity.

Fourth, and finally, I want to emphasize that the prosperity of Americans depends overwhelmingly on the economic policies we pursue to strengthen American competitiveness. Even as we work to encourage further reforms in China, we need to understand that our strength as a nation will depend, not on choices made by China’s leaders, but on the choices we make here at home.

Now, over the last few decades, China has emerged as a major economic force.

That growth was unleashed by China’s economic reforms, a growing labor force, and one of history’s greatest economic migrations from farms to factories.

But China’s growth was also made possible by the access China enjoyed to the markets, the investments, and the technology of the United States and the other major economies.

The open, multilateral system of trade and investment, with its balance of rules and responsibilities, was built with the leadership of the United States decades before China opened up to the world.

The opportunities created by the system were fundamental to China’s economic ascent, and they remain vital to China’s ability to continue to grow.

China needs the United States, but the United States also benefits very substantially from our rapidly expanding economic relationship with China.

The benefits of this relationship are hard to capture in any one statistic, but remember this.

The United States is on track to export more than $100 billion of goods and services to China this year.  Our exports to China are growing at twice the rate of our exports to the rest of the world.

These exports are supporting hundreds of thousands of jobs across the nation in all sectors – from high technology to soybeans, aircraft to autos, and forklifts to financial services.

We have a great deal invested in each other’s success.

In our economic relationship with China we have focused on two principal objectives.

The first is to expand opportunities for U.S. companies to export and sell to the Chinese market.  This requires a more level playing field for U.S. companies that compete with Chinese companies in China, in the United States, and around the world.

Our second objective is to promote reforms that will reduce China’s reliance on export led growth and encourages a shift to domestic consumption and investment.  As part of this, China’s exchange rate needs to strengthen in response to market forces.

I want to provide a quick review of some of our concerns and the extent of progress, as we see it, in each of these areas.

First, on the broader competitive landscape in China and the opportunities and challenges we face competing in China:

The commanding heights of China’s economy and its financial system are still dominated by the government.

Chinese companies and workers are able to take advantage of a range of preferences and subsidies and operate behind trade barriers that give them a competitive advantage relative to U.S. and other foreign firms and workers.

They get access to low-cost finance, land, and energy.  They enjoy preferences in terms of access to government contracts.

Next, theft of intellectual property remains widespread in China, across many industries.

And the Chinese government has introduced a range of new policies to encourage innovation in China that are designed to favor Chinese technology over foreign technology, including in the enormous Chinese government procurement market.

Where these practices violate China’s international commitments, we are actively using the remedies available under U.S. and international trade laws to protect our interests.

And China has been gradually moving to address some of our concerns.

The government recently launched a new enforcement effort to combat the theft of intellectual property and to force Chinese companies to pay for the intellectual property they use.

The Chinese leadership has committed to expand opportunities for U.S. firms in access to procurement by government entities.

And the government has committed not to discriminate against U.S. companies that operate in China.

We welcome these commitments.  They don’t address all our concerns, but they are something we can build on.  And we will continue to press the Chinese to translate these commitments into further progress.

Doing so is in their interest.  Government domination limits competitiveness within the Chinese economy and prevents the private sector from contributing to growth at its full potential.  And you can’t promote innovation if you don’t protect intellectual property.

Alongside the reforms I’ve mentioned, we want to encourage China to move definitively away from the export driven growth model of the last few decades to a growth model driven by domestic consumption.

The Chinese leadership recognizes that China is now too large relative to the world economy for it to continue to rely on foreign demand to grow.  And the government has adopted a comprehensive program of reforms to rebalance the economy and shift growth to domestic demand.

This requires reforms to increase public spending on health and education, raise and enforce minimum wages, remove barriers to investment in services, expand access to financial products for individuals and entrepreneurs, and remove subsidies for investment in the sectors that drove the initial decades of growth.

This transition will take time, but it is already having a major impact on the shape of Chinese growth, and providing increased opportunities for American companies.  Domestic demand is contributing more to growth, and as a consequence, U.S. exports to China are growing more rapidly, and U.S. companies operating in China are seeing more opportunities.

Finally, and importantly, China still closely manages the level of its exchange rate and restricts the ability of capital to move in and out of the country.

These policies have the effect of keeping the Chinese currency substantially undervalued.

They also impose substantial costs on other emerging economies that run more flexible exchanges rates, and as a result have experienced a substantial loss of competitiveness against China.

This is not a tenable policy for China or for the world economy.

If China does not allow the currency to appreciate more rapidly, it will run the risk of seeing domestic inflation accelerate and face greater risk of a damaging rise in asset prices, both of which will threaten future growth.  And sustaining an undervalued currency will undermine China’s own efforts to rebalance growth toward domestic consumption and higher-value-added production.

Since June of 2010, when Chinese authorities announced they would resume moving toward a more flexible exchange rate, they have allowed the currency to appreciate only about 3 percent against the dollar.  This is a pace of about 6 percent a year in nominal terms, but significantly faster in real terms because inflation in China is much higher than in the United States.

We believe it is in China’s interest to allow the currency to appreciate more rapidly in response to market forces.  And we believe China will do so because the alternative would be too costly – for China and for China’s relations with the rest of the world.

These are our main priorities.  China’s objectives are focused on the following areas:

• China wants more access to U.S. high technology products.

• China to take greater advantage of investment opportunities in the United States.

• China would like to be accorded the same terms of access that market economies enjoy.

We are willing to make progress on these issues, but our ability to move on these issues will depend of course on how much progress we see from China.

As China reduces the role of the state in the economy, reforms policies that discriminate against U.S. companies, removes subsidies and preferences for domestic firms and technology, and allows its exchange rate to reflect market forces, then we will be able to make more progress on China’s objectives.

In any discussion of China, I think it is important for Americans to understand the solutions to our challenges in the United States rest first and foremost in the policies of Washington, not of Beijing.

Fundamentally, how many jobs and how much wealth we create will be the result of the choices we make in the United States – not the choices of others.

In our efforts to rebuild and put Americans back to work, we have to make sure we are making the investments and reform that will be essential to our capacity to grow in the future.

As countries like China, India, Brazil and other emerging economies grow and expand, we want the American economy, American workers, and American companies to play a major role in – and gain substantial benefits from – that growth.

We want to see a substantial part of that growing demand outside of the United States met by goods and services that are created and produced in the United States, and fueled by investment in the United States.

If we are successful in doing that, we will be stronger as a nation.

But to be successful in meeting that challenge, there are things we must do.

We must invest more in research and development.

We must invest more in educational reforms.

We must invest more in public infrastructure.

We must create stronger incentives for investment in the United States, by both American and foreign companies.

We must be more forceful and effective in promoting American exports.

And we must restore fiscal responsibility.  This will require the government to spend less and spend more wisely, so that we can afford to make the investments that are critical to future growth.  And it will require tax reform that produces a system that is more simple and more fair, that encourages growth and investment, and that will help restore fiscal sustainability.

These are our challenges.  And they are not just an economic imperative, they are a national security imperative.  Our strength as a nation depends on the ability of our political system to move quickly enough to put in place solutions to our long-term problems.

Our great strengths as a country have been in our openness to ideas and talent, our capacity to innovate, our excellence in higher education, a willingness to invest public resources strategically in scientific research and discovery, and the political will to confront challenges with wisdom and force.

If we preserve and build on these strengths, and if China successfully continues on its path to a more open, market economy, then both our countries and the world economy will be in a much stronger position.

The President recently said, “We should feel confident about our ability to compete, but we are going to have to step up our game.”

China’s rise offers us the opportunity of dramatic growth in demand for things Americans create and produce.  But it also will force us to raise our game.

We should welcome both the opportunity and the challenge.

Thank you.

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