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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Last month’s Strategic and Economic Dialogue (S&ED) featured many thorny issues that have been plaguing U.S.-China relations for the past few months: North Korea, currency manipulation, Iran….and government procurement?  Yes, government procurement. Not what one would think of as a controversial topic worthy of a major dialogue between two of the world’s leading powers.  So to help us understand the addition of government procurement to the S&ED agenda is Brett Gerson, an associate in the international trade and public procurement practices at Reed Smith and co-author of the recent article “Can China’s Government Procurement Market be Cracked?” in this month’s The China Business Review.

Click here to listen to the interview with Brett Gerson or read below for the entire transcript.
Length: 19 minutes (audio will open in another browser)

In the interview, Brett mentions three laws and regulations pertaining to government procurement in China. They can be found through these links:

• 2002 Government Procurement Law of the PRC (official PRC translation)
• January 2010 Draft Government Procurement Law Implementing Regulations (Unofficial translation courtesy of the U.S.-China Business Council) – link to be updated soon
• May 2010 Draft Administrative Measures for the Government Procurement of Domestic Products (Unofficial translation courtesy of the U.S.-China Business Council)

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EL:  Just to begin, what exactly is meant by government procurement and how does this involve U.S.-China relations?

BG:  Well, essentially government procurement is the process whereby governments or government ministries or agencies can purchase goods or services at a large-scale to provide for use in the carrying out of government processes.  So for example, this could, as an example of goods, a government agency could purchase in bulk a large number of, let’s say, printers or staplers or another good.  It could also be services.  The government could enter into an agreement with an IT company to provide some type of computer services or internet maintenance or something like that.

It’s becoming a very big issue between the U.S. and China because like many other areas of China’s market, there is immense potential for companies – both Chinese and foreign – to get into China’s procurement market.  Obviously the Chinese government is huge, they have a wide array of ministries and agencies both at a, sort of, federal level coming from Beijing, and at a provincial level.

EL: And how big is this market, this potential market, in U.S. dollars?

BG:  It’s hard to say exactly.  Most estimates hover around $90 billion which is really huge.  But it is tough because it is hard to say exactly which entities are state-owned enterprises, so which are entirely private and which are sort of public in nature.  But most estimates hover around $90 billion and I have seen a couple where in 2010 that’s expected to reach $100 billion.

EL: Currently, does China have any policy or laws in regards to government procurement of foreign companies’ goods or services?

BG: Yeah.  In 2002, China promulgated the Government Procurement Law.  It’s somewhat controversial in nature but it basically just states that Chinese government agencies and entities must purchase domestic goods, works or services except where those goods, works or services can’t be obtained within China under reasonable commercial terms.  Those reasonable commercial terms are defined as 20 percent more than imports.  Now, the problem with the Government Procurement Law is that it never defined what is “domestic.”  So companies, particularly foreign companies, had a hard time cracking that market because it was so easy for the Chinese government and Chinese government agencies and entities to just simply purchase products – goods or services – from Chinese companies.

Since 2002, there has been a lot of international pressure on China to better define what is domestic.  They finally did this in January 2010, just about six months ago, the Chinese government issued what’s called the Implementing Regulations.  These aren’t exactly law, but they define how the Chinese government is suppose to carry out the Government Procurement Law.  The Implementing Regulations set forth that….it better defined domestic.  It says that essentially domestic manufacturing costs that exceed a certain threshold, those products will be defined as domestic.  Now in the implementing regulations, they didn’t actually set the threshold.  We were able to look at some other guidance that the Chinese government issued recently and we were able to guess that they probably meant 50 percent.  Now, just a few weeks ago, right before the high-level meetings in China that you discussed, the Chinese government again issued another sort of policy guidance paper that did clarify that the threshold for a product to be considered domestic is 50 percent of domestic production costs.

EL:  So if they have clarified this recently and this law has been in place since 2002, why is this now becoming such

an issue? What has caused government procurement to become almost the centerpiece of the Strategic and Economic Dialogue last month?

BG:  There’s two main reasons and they sort of come together.  The first is that in the World Trade Organization, there is an agreement called the Government Procurement Agreement [GPA].  It’s a plurilateral agreement meaning that some but not all of the World Trade Organization members are a part of this agreement.  It basically just states that if you’re a party to this agreement, you cannot favor products or services from your country against those from a foreign country.  China, when they first came on to the World Trade Organization in 2001, they promised that they would join the Government Procurement Agreement as soon as possible.  Now, they have submitted a proposal before, back in 2007, but it didn’t quite come to the level of international best practices.  The member countries essentially rejected it.  Since that point, the United States as well as major European countries and other members to the GPA, have pressured China to resubmit a proposal that do come up to the standard that the member countries expect.  Finally, China agreed just recently at the high-level discussions in China that they were going to submit a new proposal in July of this year.  Right before the time the World Trade Organization Government Procurement Committee meets.  So I think that is one of the issues that is really bringing it to the forefront, is that there is a lot of pressure on China to join the GPA agreement.

The other issue, and this was also discussed and mentioned by Hillary Clinton and Timothy Geithner, is China has set forth a very controversial policy called indigenous innovation policies.  And basically these are policies that direct provincial governments and agencies and ministries to buy only from certain product catalogs.  These catalogs are primarily made up of high-tech and IT goods and traditionally it’s been extremely hard for foreign companies to get their products onto these catalogs.  For example, and I mention this in the article, out of the Shanghai-based catalog, there are over 500 products that are listed on this catalog, and foreign products make up only two of these products.  Of those two, they are not entirely foreign entities, they’re joint ventures between a foreign company and a local Chinese company.

So I think those two issues, one that China has been slow to join the World Trade Organization Government Procurement Agreement and two, these indigenous innovation polices that make it very difficult for foreign companies to get their high-tech products listed on these procurement catalogs.

EL:  But in terms of China favoring its domestic products over foreign products, is China really acting any differently than from any other countries in terms of government procurement?  Doesn’t in the U.S., isn’t the U.S. government required to purchase U.S. products?  How is China any different from that?

BG:  Well there’s a couple of differences.  The U.S. and other countries that are members of the GPA do have policies that direct or allow their own domestic government entities to purchase only domestic products.

There’s a couple of differences.  One, here in the U.S. we have what is called the Buy American Act.  The Buy American Act essentially says that federal agencies can only procure unmanufactured articles that have been mined or produced in the U.S. or manufactured articles that were made substantially of articles or materials mined or produced in the U.S.  But there are several exceptions.  One is you can waive that if it would be consistent with public interest or if observing that preference would be inconsistent with the public interest.  Second, where the cost of buying the U.S. good is, sort of, unreasonably higher than would you purchase them from a foreign entity.  The third exception is where the products in question are in too short of a supply in the U.S. to make that purchase feasible.

In addition to that, government agencies may purchase foreign-made information technology equipment.  So that’s sort of a big issue and that sort of touches upon the China indigenous innovation policies – there is sort of a cut-out for U.S. government agencies to waive the Buy American requirements for sort of high-tech, IT goods.

Also, the Buy American Act doesn’t include services which the Chinese government procurement policies will.  As you know, services is a huge sector for foreign companies in China: legal services, accounting services, IT services, things of this nature.

In addition to the Buy American Act, we also have the Trade Agreements Act and this is a pretty big issue because the Buy American Act will be waived where we have a trade agreement act, an agreement with another country.  These include all the countries that are signatories of the WTO Government Procurement Agreement that we mentioned before that China is not a signatory to; these also include all countries that we have free trade agreements with ; all these developed countries and also the Caribbean basin countries.

You are right in that the U.S. does have certain policies like the Buy American Act that on their face appear somewhat discriminatory.  But I think that the differences between China’s policies and the U.S. policies is that we have so many carve-outs for our Buy American Act: exceptions and instances where the Buy American Act requirements will be waived where we have agreements in place with other countries.  China is not one of them.

EL:  Just to go back to the indigenous innovation policy of China, because that was something that Secretary of State Clinton did mention specifically as a problem.  I guess just examining the equities of it.  Given that the U.S. and other countries were largely able to develop their technology sector before our current global trade system, and before there was competition from other countries, shouldn’t China also be permitted this luxury?  Don’t they have an opportunity to catch up?  Isn’t China’s indigenous innovation policy just a way to allow its small but growing technology sector to really flourish?

BG:  There is no question that China should be allowed to sort of foster the growth of their high-tech services but I

think, and Secretary Clinton and Secretary Geithner both mentioned this, that there’s ways to do this that are less discriminatory for foreign firms.  Rather than link the indigenous innovation policies to government procurement – which they are trying to do – we think that there are other ways such as using tax incentives or research and development support programs that can sort of achieve the same goals without the discriminatory effect.  We think that generally China grow this area by including foreign firms rather than excluding them.  Like I said, there are certainly sort of high-tech tax status programs that they can enter into and R&D programs.

One of the big ways that their policies discriminate against foreign firms is, initially when they released the indigenous innovation policies, they required that to get on these catalogues that I mentioned before, the company has to…the trademark of the product has to be owned by a Chinese company and they also had to have full ownership of the products IP [intellectual property] in China.  This was really stringent, this was tough.  Thankfully, just a couple of months ago in April actually, the Chinese government again released sort of guiding, implementing regulations memo.  Now, this doesn’t have the force of law but they’re proposing to relax these requirements by saying that instead of having full ownership of the trademark in China, the company need only have exclusive rights to the product’s trademark in China.  Instead of having complete ownership of the intellectual property in China, you only have to have a license to use the intellectual property in China.

So this is definitely a step in the right direction.  But ultimately, I think ideally foreign companies, U.S. companies, would want to de-link the indigenous innovation policies from government procurement.

EL:  Just getting back to the Strategic and Economic Dialogue, do you know what it was that the U.S. side was seeking to achieve in terms of government procurement and indigenous innovation policy.  I know that you had mentioned a little bit before but can you just summarize that the U.S. wanted out of it?

BG:  Sure.  I think the first thing they wanted is to urge China to submit an additional proposal, a new proposal, to the World Trade Organization Government Procurement Agreement, which they have agreed to do by mid-July so that’s definitely is a step in the right direction.  We don’t know exactly what that is going to say but we are think that it is going to be a step closer to international best practices and the other proposals that the member countries have agreed to.

Second, I think that, the U.S. delegates really wanted the Chinese government to relax the indigenous innovation policies and de-link them from the government procurement policies.  As it stands right now in the Implementing Regulations, Article 9 says that Chinese government entities and agencies should favor indigenous innovation products which are only listed on these catalogues like I mentioned.  So I think what the U.S. government would like to see is getting rid of the indigenous innovation article from the Government Procurement Law.  It is unclear that the Chinese government is going to do that.

EL:  Even though it seems like there was some progress at the Strategic and Economic Dialogue and that China has agreed to submit a new proposal, do you really see though China, I guess, even if it submits a new proposal, do you see that proposal to the WTO to join the Government Procurement portion of the WTO, do you see that as actually being something that other member countries would agree to?  Do you see China acquiescing to a lot of the foreign pressure and is it really in China’s self-interest to do that at this stage in its development?

BG:  It’s hard to say at this point.  I think we’ve seen that, in other areas, in strategic and economic areas, China has certainly refused to acquiesce to international pressure to do certain things or not to do certain things.  So it is hard to say without seeing their proposal.  I think that the GPA member countries would reject a proposal that is not up to standard.  They’ve done it before and I think they might do it again.  And I’m not sure that would be in China’s interest.  I think China at this point would have to understand what the member countries expect, what the parameters would be.  And it’s unclear to me that they would submit something that would be any less than that.  So it’s hard to say.  I don’t know.

Generally it seems that China doesn’t acquiesce.  However if the international community is successful in persuading them that it is in their best interest, to relax their indigenous innovation policies and to de-link them from government procurement, then I think they will go ahead and submit a proposal that’s up to par, that’s in line with international best practices.

Over the last several months, in January, since they issued their Implementing Regulations, there has been significant international backlash and they have sort of watered down some of the more strict discriminatory provisions in the Implementing Regulations.  So there’s been progress.  I suppose they only have another six, seven weeks before they’re going to submit their proposal to the Government Procurement Committee so it is unclear how much further they are going to go in watering those items down.

EL:  Well I guess only time will tell what happens in July.   Thank you.

BG:  It will be interesting; hopefully we can follow up and discuss what happened.

EL:  That would be great.  Thank you so much for your time.

BG:  Thank you.

As Marcy Nicks Moody pointed out in her article, “A Dusty Springfield Approach to the Chinese Exchange Rate,” the Treasury Department was to release its report on international economic and exchange rate policies on April 15.  But last week, Treasury Secretary Tim Geithner announced that he would delay the release of the report  noting that key meetings with world leaders in the upcoming months necessitated the delay.  Many saw this as a sign that the U.S. was in dialogue with the Chinese about the exchange rate with the real possibility that China would give its currency some freedom.

But in today’s New York Times, Michael Wines reports that perhaps we shouldn’t be so sure.  Domestic fiscal and monetary policy issues are pushing Chinese leaders not to float the yuan, Chinese currency (a.k.a. the renminbi or RMB).  Interestingly, the online version of this article has the title “China’s Recovery Keeps Focus on Interest Rates and Currency” while the title in today’s paper version is the more explosive “China Move on Currency Not at Hand.”

So will China succumb to foreign pressure or will it remain focused on its own recovery and not look to change its currency policy just yet?  You decide.  Take our poll on this issue listed on the left hand side of the website.  Results will be posted next Friday, April 23.

This past Monday and Tuesday marked the sixth Strategic and Economic Dialogue (S&ED) between the U.S. and China.  Formerly just the “Strategic Economic Dialogue” and before under the sole supervision of the U.S. Treasury

Department, the inclusion of  the conjunction “and” to the title brings non-economic issues to the table as well as Secretary of State Hillary Clinton.

On day one of the two-day conference, President Obama spoke to the delegation, stressing the need for the U.S. and China to continue cooperation to guarantee a lasting economic recovery, to lessen the impact of climate change and promote “a clean, secure and prosperous energy future,” and to stop the spread of nuclear weapons in places like North Korea and Iran (these three issues were also the main thrust of an op-ed written by Secretary Clinton and Secretary of the Treasury Timothy Geithner  in Monday’s Wall Street Journal) .

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Was the S&ED successful?  Did it produce more than just mere rhetoric?  At first glance, no.  But in the relationship between the U.S. and China, sometimes even rhetoric is a step forward.  See below for a review of the issues in greater detail.

(1) Climate Change

There was definitely paper success here.  The U.S. and China signed a Memorandum of Understanding  to Enhance Cooperation on Climate Change, Energy and the Environment (MOU), but the MOU just puts on paper existing relationships and does little to further climate change cooperation.  Both governments promise to continue with the Ten Year Cooperation Framework on Energy and Environment signed just last year and both promise to promote cooperation on a variety of vague steps, including capacity building and cooperation “between cities, universities, provinces and states of the two countries.”  Perhaps this shows a greater understanding on the part of U.S. policy makers that “capacity” is something that China sincerely needs assistance with (see The U.S. in Copenhagen: Preventing Another Toothless Tiger).  Also, in a nod to the Chinese delegation’s claim of differing responsibilities between developed and developing countries, the MOU states “Consistent with equity and their common but differentiated responsibilities, and respective capabilities, the United States and China recognize they have a very important role in combating climate change” (emphasis added)  Only time will tell if any of this rhetoric becomes a reality and whether the U.S. and China can reach an agreement in time for Copenhagen, an increasingly less likely proposition.

(2) Economic Recovery

Discussion regarding economic recovery was perhaps the most public, and most interesting, of all the talks.  Showing the changing dynamic of the U.S.-China relations, Xie Xuren, the Chinese finance minister, called the U.S. to task and requested that it reduce its budget deficit.  Holding an estimated $1.5 trillion in U.S. Treasuries, the Chinese government is concerned that an increased deficit could weaken the dollar, lowering the value of their Treasuries.  At the same time, for the U.S. to decrease deficit it would need to buy less goods, further decreasing demand on China’s manufacturing sector (an unfortunate Catch-22 here for China).  While Secretary Geithner promised the Chinese delegation that the U.S. would lower its deficit once recovery has begun, he also called upon the Chinese to increase

domestic demand and lower the astronomically high savings rate of its people (estimated at 50%) in an attempt to rebalance the U.S.’ trade deficit with China.

(3) Currency

Always a thorny issue, the U.S.’ repeated request that China allow its currency to strengthen was most likely discussed during the S&ED.  However, nothing about currency was mentioned publically.

(4) North Korea

China has taken a much more foreceful approach to North Korea.  In May, when North Korea first began its saber-rattling, China spoke a hard-line against its neighbor, agreeing to abide by U.N. Security Council sanctions.  Less clear is what actions China actually undertook to promote these sanctions.  And although North Korea was a main point in President Obama’s speech before the S&ED, publically, neither the U.S. nor China made any statements on how they will cooperate to contain the country.   Such silence is par for the course since North Korea is a very sensitive issue for China but at the same time, their assistance in dealing with the North Koreans is essential.