Thread: Sino-US Relations, General Discussion.

This is in a way the G2 Strategic and Economic Summit. It will be held in Washington in the last week of July.

The importance of this G2 Summit in world affairs will grow year by year. China is being invited to take its place as the 2nd super power. Who can imagine this, say just ten years ago.

U.S., China to launch new high-level talks in July

BEIJING, June 2 (Reuters) - The United States and China will inaugurate their cabinet-level Strategic and Economic Dialogue in Washington in the last week of July, the U.S. Treasury said on Tuesday.

The forum is a reincarnation in a broader format of the Strategic Economic Dialogue set up by former Treasury Secretary Henry Paulson, who used the forum to engage Beijing on an array of issues critical to longer-term bilateral relations.

Talks under the umbrella of the SAED will take place once a year in alternate capitals, the White House said in April. Meetings under Paulson's initiative were every six months.

U.S. Treasury Secretary Timothy Geithner and Chinese Vice Premier Wang Qishan will lead the economic track of the SAED; parallel talks on strategic and security issues will be under the leadership of U.S. Secretary of State Hillary Clinton and Chinese State Councillor Dai Bingguo.

June 8, 2009
For China-U.S. Talks on Climate, Issues Old and New
By JOHN M. BRODER and JONATHAN ANSFIELD

WASHINGTON — For months the United States and China, by far the world’s two biggest emitters of greenhouse gases, have been warily circling each other in hopes of breaking a long impasse on global warming policy.

They are, as President Obama’s chief climate negotiator puts it, “the two gorillas in the room,” and if they do not reach some sort of truce, there is no chance of forging a meaningful international treaty in Copenhagen later this year to restrict emissions.

As a senior American team arrived in Beijing on Sunday for climate talks, the standoff was taking on the trappings of cold-war arms control negotiations, with gigatons of greenhouse gas emissions replacing megatons of nuclear might as a looming risk for people across the globe.

Both sides are demanding mutually assured reductions of emissions that are, in the current jargon, “measurable, verifiable and reportable.” In the background hover threats of massive retaliation in the form of tariffs or other trade barriers if one nation does not agree to ceilings on emissions.

“This is going to be one of the most complex diplomatic negotiations in the history of the world,” said Representative Edward J. Markey, Democrat of Massachusetts, the co-sponsor of an energy bill being debated in the House, who just returned from a week in China.

Many take the simple fact that the two nations, jointly responsible for more than 40 percent of the world’s greenhouse gas emissions, are even talking seriously to each other about the issue as a propitious sign after years of mutual distrust.

But there is cause for profound skepticism as well. The Chinese continue to resist mandatory ceilings on their emissions and are making financial and environmental demands on the United States that are political nonstarters. The United States, despite optimistic words from the White House and Congress, has yet to enact any binding targets on greenhouse-gas emissions or to abide by any international climate treaties. The energy bill now before Congress proposes emissions targets that are far short of what China and other nations say they expect of the United States.

Compounding the difficulty is the fact that both countries are struggling economically and the Chinese and American publics appear far more interested in jobs than in tackling environmental problems, a task that would necessarily be costly.

The main product of the discussions with Beijing so far has therefore been agreement to hold more discussions.

Yet the clock is ticking. Only six months remains before the opening of United Nations-sponsored talks in Copenhagen to produce a climate change treaty to replace the 1997 Kyoto Protocol. Without the full participation of the United States and China, most negotiators believe that any agreement is doomed to fail. Congress and two American presidents refused to accept the Kyoto accord, which expires in 2012, because it imposed no pollution limits on China or other developing countries. The American refusal to ratify the treaty and the lack of participation by China and other developing nations have left the pact all but toothless.

“China may not be the alpha and omega of the international negotiations, but it is close,” said Todd D. Stern, the top American climate negotiator at the three-day talks in Beijing. “Certainly no deal will be possible if we don’t find a way forward with China.”

The Obama administration has pledged to be a leader in the talks that culminate in December in Copenhagen, although it is far from clear that Congress has the will to approve emissions targets and furnish enough aid to developing countries to satisfy the Europeans, Chinese, Indians, Brazilians and other major players. Mr. Stern described the demands from China and other countries as “not serious,” and said the United States was “jumping as high as the political system will tolerate.”

As a measure of how far apart the two nations are, China says the United States should reduce its greenhouse gas emissions by 40 percent below 1990 levels by 2020. The bill before Congress, which could be further weakened, now calls for less than a 4 percent reduction over that period.

The Chinese have begun to consider a series of unilateral actions to reduce carbon dioxide emissions, stepping up production of renewable electricity and increasing the efficiency of their manufacturing, buildings and vehicles. But Beijing insists it will not sacrifice China’s economy to meet the demands of outsiders, particularly those in the developed world that are responsible for the vast majority of human-caused carbon dioxide already in the atmosphere.

“What they are saying right now is, ‘We can do a lot of things, but we don’t want to commit to any targets,’ ” said Jin Jiaman, executive director of the Global Environmental Institute, based in Beijing, which has helped pave the way for the current talks. “They want to preserve their right to develop.”

One of China’s senior climate negotiators, Su Wei, has said that although China will not accept absolute limits on its emissions, officials have begun to consider putting in place their own domestic targets to significantly reduce the carbon intensity of its heaviest-emitting industries. Under the current official five-year plan, China is trying to reduce the amount of energy emitted per unit of gross domestic product by approximately 20 percent by 2010, a goal it may or may not meet. Some experts question the accuracy of China’s official reports, and say it will be impossible to monitor the nation’s progress without a better system for tracking greenhouse gas pollution.

In a tough speech in Washington this week, Mr. Stern said that such modest reductions would do little to affect atmospheric concentrations of climate-altering gases. He also noted that China emitted four times as much carbon dioxide as the United States and six times as much as the European Union or Japan for every unit of gross domestic product.

“China and other developing countries do not need to take the same actions that developed countries are taking,” Mr. Stern said, “but they do need to take significant national actions that they commit to — internationally — that they quantify, and that are ambitious enough to be broadly consistent with the levels of science.”

The House speaker, Nancy Pelosi of California, who led a delegation of lawmakers to China at the end of May, said in an interview that she was hopeful about the dialogue between the two countries but fearful that they would fall into the old trap of hiding behind each other.

“They told us if we’re not going to do something, they’re not going to do anything,” she said. “Some of the people we talked to there said we should do more. I think we should do more, too. But we all have to go down this path together.”

John M. Broder reported from Washington, and Jonathan Ansfield from Beijing.
http://www.nytimes.com/2009/06/08/wo...gewanted=print

Interesting commentry from the point of view of US lawmakers about US-China relations.

Duet With the Dragon: What’s Next In U.S.-China Relationship?

20 June [CQPolitics] Rick Larsen , a 44-year-old fifth-term House Democrat from Washington’s Puget Sound, is no headline grabber. Most of the time, he tends to his district’s business. As in many parts of his state, that business is often China — more than $4 billion in sales annually from exporters such as Boeing Co. and Microsoft Corp. to the authoritarian, yet distinctively capitalist, Asian giant. “People talk about the Far East. It’s my near West,” Larsen says.

That’s what led Larsen in 2005 to join with Mark Steven Kirk , a moderate Illinois Republican also first elected eight years ago, to form the U.S.-China Working Group for interested members of the House. Lawmakers of all stripes — critics of the country’s human rights record, fans of its growing markets, hawks wary of its military intentions — all needed a forum, the two representatives decided, to learn more about the nuances of dealing with China.

The need was particularly acute to Kirk, a longtime intelligence officer in the Naval Reserve, who noticed during weekend stints at the Pentagon that China’s economic and military clout came to dominate President George W. Bush ’s schedule, both in meetings with foreign leaders and phone calls. Members of Congress and the media, according to Kirk, still weren’t making the connection.

The days when China could be ignored by official Washington, it’s safe to say, have ended.

In the span of a few years, U.S.-China dealings have grown from a wary association dominated by concerns over trade, Taiwan and human rights into a broad, all-encompassing and complicated embrace touching almost every major policy issue and underscored by China’s recently acquired status as the United States’ biggest creditor.

Indeed, while allies in London, Tokyo and Ottawa may grumble, the connection between the United States and China, underpinned by the two countries’ deep economic dependency, has ripened into a “special relationship” that dwarfs U.S. ties with any other country. That is so much the case that critics and supporters alike now speak of a Sino-American Group of 2 — a “G-2” that is becoming critical to managing the global economy and finding solutions to a host of problems. In areas where Washington and Beijing can find a middle ground, the rest of the world may find it necessary to sign on.

Partly, this stems from the realization that because of China’s sheer size — it has the largest population of any nation and is poised to overtake Japan as the No. 2 economy within two years — decisions made in Beijing have ramifications for businesses and governments the world over. If lawmakers care about international climate change negotiations, the global financial crisis, product safety or myriad security challenges from North Korea to Cuba, they now have to care about China. ...

It is good they hold such military talks. Not sure what position this Gen Ma from China holds.

China and US hold military talks

23 June [BBC] Defence officials from the United States and China are meeting in Beijing for two days of high-level talks.

They are expected to discuss several recent naval confrontations between the two countries in the South China Sea.

North Korea's recent nuclear and missile tests - and how to react to them - will also be on the agenda.

Military relations between China and the US have been strained since last year because of the US sale of arms to Taiwan.

Michele Flournoy, the US under secretary of defence for policy, is leading the US delegation for the talks, set up in 1997.

She will meet Lieutenant General Ma Xiaotian from the People's Liberation Army, China's armed forces. ...

Edit: Got the info about the China Gen. "The Chinese side was expected to be led by Ma Xiaotian, deputy chief of the general staff of the People's Liberation Army, the China Daily said."

One is a military man, the other is a civilian.

Ma Xiaotian was an air force guy and generally considered to be a "new image" of the PLA, educated (president of National defense U), fit, and speaks English.

They had the first day of the two-day talks.

China-US military talks begin

24 June [Aljazeera] Defence officials from China and the US have begun their first high-level talks in 18 months, with recent naval confrontations between the two sides and tensions over North Korea's nuclear programme topping the agenda.

The discussions, formally labelled the US-China Defence Consultative Talks, were suspended by Beijing last year in anger over US arms sales to Taiwan - a self-governing island over which China claims sovereignty.

Chinese officials have said the two sides would discuss a range of international security issues in addition to Taiwan. ...

According to state media, much of the first day of talks was taken up with discussion of recent confrontations between Chinese and US naval vessels in waters that China claims as its own territory. ...

US defence officials also fear that China's navy is growing increasing aggressive in its patrols and have called for more contacts on the issue to head off potential dangers.

The state-run China Daily newspaper reported that the topic took up 45 minutes out of the three-hour opening session on Tuesday, although no conclusions were announced.

The talks also come as the US navy continues to track a North Korean freighter, the Kang Nam, that according to some reports is carrying weapons including missiles and missile parts bound for Myanmar. ....

On Tuesday Qin Gang, spokesman for the Chinese foreign ministry, said that evidence must be put forward by countries tracking the Kang Nam before any move was made to board the ship and check its cargo.

"China will strictly observe the relevant resolution of the Security Council. We believe ship inspections should be enforced according to relevant international and domestic laws, and one should have ample evidence and proper cause," he said. ...

Meet again in July? It means they have to go back before coming back to talk again.

China, US hail defence talks despite lingering tensions

1 hr ago BEIJING (AFP) — China and the United States Wednesday hailed defence talks here as a step forward in mutual understanding and agreed to meet again in July to discuss how to avoid a repeat of recent high-seas standoffs.

However, in an illustration of lingering tensions, China also called on the US to cancel an arms sale to Taiwan and stay away from waters where this year's maritime confrontations took place.

The talks were held amid military tensions between the two giants linked to those issues, as well as US concern that China was being opaque about its long-term military build-up. ...

Shared interest.... I like it.

The two sides also discussed shared interests in Afghanistan, Pakistan and Iran




China, US Hold Defense Talks, Plan More
By Stephanie Ho
Beijing
24 June 2009


U.S. Department of Defense Undersecretary Michele Flournoy, left, meets with Chinese Defense Minister Liang Guanglie in Beijing, China, Wednesday, 24 June 2009
U.S. Department of Defense Undersecretary Michele Flournoy, left, meets with Chinese Defense Minister Liang Guanglie in Beijing, 24 June 2009
Chinese and U.S. officials say the two countries share a common concern over a nuclear-weapons armed North Korea and both countries say they want to avoid confrontations at sea. These were among the issues discussed in two days of high level defense talks that ended in Beijing. Under Secretary for Defense Michele Flournoy headed the U.S. delegation.

Speaking to reporters in Beijing, she said both countries share concern about what she described as North Korea's recent "provocative actions," and discussed the North Korean nuclear issue in general.

She said the two sides did not specifically discuss a North Korean ship off the coast of China that is allegedly carrying small arms to Burma. If verified, this would be in violation of a U.N. Security Council resolution that was recently imposed on Pyongyang after it conducted its second nuclear test at the end of May.

"This was not the appropriate forum to have detailed operational level discussions about how enforcement of this U.N. Security Council resolution was going to go," Flournoy said.

Serious concerns about North Korea

The head of the Chinese side, Lieutenant-General Ma Xiaotian, said his country has "serious concerns" about a nuclear North Korea. But he urged all parties to keep negotiating.

Ma says he is confident the U.S.-China military relationship will continue to strengthen in the future.

Ma says he believes military ties will continue to make progress despite all the difficulties.

One recent issue has been a series of encounters between U.S. and Chinese ships in waters off China's coast that Beijing claims are within its so-called exclusive economic zone. The Pentagon has said the U.S. ships involved were operating in accordance with international law.

U.S. and Chinese military officials will hold special consultations in July, to address the sea confrontation issue.

Tension over Taiwan arms sale

The two sides also discussed shared interests in Afghanistan, Pakistan and Iran, and with international anti-piracy efforts off the coast of Somalia.

The just-concluded defense talks resumed after an 18-month hiatus. China suspended the meetings last year, after the Bush administration announced a multi-billion-dollar arms deal with Taiwan, a separately governed island that Beijing considers a renegade province.

Under Secretary Flournoy said the Obama administration "inherited" the arms-sale to Taiwan and is in the process of deciding how it plans to proceed.
VOA News - China, US Hold Defense Talks, Plan More

I swear, that Kissinger guy must have a summer home in China, he goes to China like people go to the movie or something.



Chinese State Councilor meets former U.S. Secretary of State

english.chinamil.com.cn 2009-06-30

　　BEIJING, June 29 (Xinhua) -- Chinese State Councilor Liu Yandong met here Monday with Henry Kissinger, the former U.S. secretary of state.

　　Liu highlighted the robust growth of the China-U.S. ties since the two forged diplomatic relations 30 years ago, noting that the bilateral relations scored a good beginning and maintains positive momentum since the Obama administration took office.

　　China is committed to work with the United States to further promote the bilateral dialogue and cooperation at various levels and in national development, education, science and technology and culture, Liu said.

　　Echoing on Liu's views, Kissinger defined relations between the United States and China as one of the most important bilateral relations in the world, saying that the two nations play vital roles in promoting world prosperity and safeguarding the international peace and stability.

　　Kissinger was here at the invitation of the Chinese People's Institute of Foreign Affairs.

astralis,

Steven Chu and Gary Locke to China.......wonder what those two have in common.




July 14, 2009
China Builds High Wall to Guard Energy Industry
By KEITH BRADSHER

http://www.nytimes.com/2009/07/14/bu...gewanted=print

BEIJING — When the United States’ top energy and commerce officials arrive in China on Tuesday, they will land in the middle of a building storm over China’s protectionist tactics to become the world’s leader in renewable energy.

Calling renewable energy a strategic industry, China is trying hard to make sure that its companies dominate globally. Just as Japan and South Korea made it hard for Detroit automakers to compete in those countries — giving their own automakers time to amass economies of scale in sheltered domestic markets — China is shielding its clean energy sector while it grows to a point where it can take on the world.

Steven Chu, the American energy secretary, and Gary Locke, the commerce secretary, are coming here to discuss clean energy and global warming with Chinese leaders, and to see if progress can be made toward getting China to agree to specific targets for reductions in greenhouse gases. Agreement proved elusive during the Group of 8 summit meeting last week in Italy.

But Mr. Chu and Mr. Locke arrive as Western companies, especially Europeans, are complaining increasingly about Beijing’s green protectionism.

China has built the world’s largest solar panel manufacturing industry by exporting over 95 percent of its output to the United States and Europe. But when China authorized its first solar power plant this spring, it required that at least 80 percent of the equipment be made in China.

When the Chinese government took bids this spring for 25 large contracts to supply wind turbines, every contract was won by one of seven domestic companies. All six multinationals that submitted bids were disqualified on various technical grounds, like not providing sufficiently detailed data.

This spring, the Chinese government banned virtually any installation of wind turbines with a capacity of less than 1,000 kilowatts — excluding 850-kilowatt designs, a popular size for European manufacturers.

Lu Hong, the program officer for renewable energy in the Beijing office of the Energy Foundation, a nonprofit group seeking to support sustainable energy, said that China was willing to invest heavily in renewable energy industries, even though wind and solar energy costs are higher than for coal, precisely because it helps the Chinese economy.

“The Chinese government won’t consider such a big solar industry without considering the building up of the domestic industry,” she said, adding that China’s policies will also help address global warming.

Zhou Heliang, the president of the China Electrotechnical Society, a government entity that plays a broad role in national and provincial technology policy, predicted at the Wind Power Asia conference here on Friday that Chinese-owned companies would increase their share of the Chinese market by an additional 10 or 20 percentage points this year.

That would give them almost three-quarters of the domestic market, compared with a quarter for European and American companies — the reverse of the ratio four years ago.

This year, China passed the United States as the world’s largest market for wind energy. It is now building six wind farms with a capacity of 10,000 to 20,000 megawatts apiece, using extensive low-interest loans from state-owned banks.

By comparison, T. Boone Pickens delayed his plans to build a 4,000-megawatt wind farm in Texas, once promoted as the world’s largest.

Some foreign companies, particularly European businesses, are starting to express misgivings about China’s promotion of the local manufacturers.

European wind turbine makers have stopped even bidding for some Chinese contracts after concluding that their bids would not be seriously considered, said Jörg Wuttke, the president of the European Union Chamber of Commerce in China.

European turbine manufacturers are especially disappointed because they built factories in China in order to comply with the country’s requirement that turbines contain 70 percent local content, Mr. Wuttke said. Yet all the multinational manufacturers were disqualified on technical grounds within three days of bidding for wind farm contracts this spring, even as Chinese companies that had never built a turbine were approved, he said.

European solar power companies are also unhappy. “This is not a level playing field,” said Boris Klebensberger, the chief operating officer of SolarWorld AG, which is based in Bonn.

Mr. Wuttke said he was encouraged that Premier Wen Jiabao of China told Chancellor Angela Merkel of Germany in a telephone call on June 25 that China would not discriminate against foreign enterprises, according to the official Xinhua news agency.

But no new Chinese renewable energy regulations have been issued since then on local content requirements or other rules.

American companies play a smaller role in the global renewable energy industry, but some of them are also growing exasperated with the Chinese market. “That has been a tough market for non-Chinese manufacturers,” said Victor Abate, General Electric’s vice president for wind energy.

Kevin Griffis, a Commerce Department spokesman, said that the agency had not heard from American companies about difficulties in the Chinese market for renewable energy.

“Generally speaking,” Mr. Griffis said, “we support a business environment that is open, transparent, and fair so that all companies are able to compete based on product performance, not country of origin.”

World Trade Organization rules ban countries from using local content requirements to force companies like the wind turbine manufacturers to set up factories in a country instead of exporting to it. But much of China’s power industry, although publicly traded, is majority owned by the government.

While China promised to sign the W.T.O. side agreement on government procurement “as soon as possible” when it joined the free trade group in 2001 and won low-tariff access to foreign markets, it has never actually signed the side agreement. So its huge state sector remains largely exempt from international trade rules.

Other rules are also making it hard for foreign manufacturers and investors to compete in China.

China’s renewable energy standard requires that renewable energy account for at least 3 percent of the generating capacity of each large power company, excluding hydroelectric power, by the end of next year. But the rules do not dictate how much electricity must actually be generated from that capacity.

So power companies have an incentive to buy the cheapest wind turbines available, so as to increase their renewable energy capacity — even if the turbines break down frequently and do not produce that much electricity.

Turbines from Chinese-owned companies tend to have slightly lower purchase prices than foreign-brand turbines, but have higher repair costs, so the life cycle costs are similar, according to Chinese experts. United Nations data from the trading of carbon credits shows that the Chinese-brand turbines produce less electricity because they are more frequently out of action.

Financial regulations for wind farms also make it harder for foreign-owned farms than domestic-owned farms to borrow money or to sell carbon credits. Even well-connected international funds like Nature Elements Capital have to look hard for projects, while less-connected funds have struggled to find any at all.

Mr. Zhou said that China was also working hard to develop its own capability to manufacture high-tech materials that can withstand the torque, humidity and other stresses that affect wind turbines.

Two American companies are leading suppliers of materials: PPG Industries of Pittsburgh, the leading maker of fiberglass and protective coatings for the wind turbine housings and blades, and the Zoltek Corporation of Bridgeton, Mo., the world’s dominant supplier of carbon fiber for the support struts inside the most high-tech blades.

A report last month by IHS, a global data company, concluded that Chinese wind turbine makers would soon start exporting. That is because Chinese wind farm installations could level off temporarily as the power grid struggles to install enough high-power lines to use all the electricity wind produces.

Asked whether European turbine manufacturers risked sharing Detroit’s overconfidence in the 1970s in the face of challenges from Japan, Mr. Wuttke said that European makers believed that their reputations for quality and reliability would protect them.

Correction: An earlier version of this article misstated the terms of a government requirement affecting a solar power plant in China. The government required that at least 80 percent of the equipment for the plant be made in China, not 80 percent of the panels.

US wins trade dispute with China over CDs, DVDs

By BRADLEY S. KLAPPER – 10 hours ago

GENEVA — Officials say the U.S. has largely prevailed in a trade dispute with China over restrictions on the sale of American CDs, DVDs, books and computer software.

Officials familiar with the World Trade Organization ruling are telling The Associated Press that the WTO found Beijing is breaking trade rules by forcing U.S. goods to be sold through Chinese state-owned companies.

The officials say the still-confidential ruling stops short of a complete U.S. victory. It allows China to make U.S. films go through one of two distributors to be shown in Chinese cinemas, a requirement that doesn't apply to Chinese movies.

The officials spoke about the ruling on condition of anonymity because of confidentiality rules ahead of its publication.

Copyright © 2009 The Associated Press. All rights reserved.

The Associated Press: US wins trade dispute with China over CDs, DVDs

China and America
Doubled up

Jul 23rd 2009 | BEIJING
From The Economist print edition
G2: twice as big, no more productive

ADDING a conjunction to the name of a diplomatic forum may not sound like much, but America and China insist it is significant. On July 27th the two countries will hold their first Strategic and Economic Dialogue attended, unlike previous conjunctionless ones, by America’s secretary of state. Both hope the upgrade will help them deal with everything from climate change to global economic imbalances. It may not.

China, ever worried about the impact of its rising power on American political opinion, has been pleased that Barack Obama’s campaign slogan “change” does not seem to apply to America’s dealings with China itself. The new forum merely tweaks the Strategic Economic Dialogue launched by President Bush in 2006 which was led on the American side by the treasury secretary. It also absorbs a security-focused forum called the Senior Dialogue which began in 2005. Hillary Clinton’s involvement, alongside her treasury counterpart, Timothy Geithner, raises the status of America’s participation, which, the Americans hope, will encourage more progress on issues—especially climate change—that straddled the remits of the forum’s precursors.

On the global economy, the two sides are already broadly in agreement. Both have big stimulus programmes. Both think China’s consumers need to spend more, America’s to save more. China mutters about moving away from the dollar as a reserve currency but in May, its holding of US Treasury debt rose by $38 billion, to more than $801.5 billion—its highest level ever. Climate change, on the other hand, is producing posturing. The topic has been a prominent one in recent visits to Beijing by American officials, including Mrs Clinton, Mr Geithner and the commerce secretary, Gary Locke. In a speech to businessmen, Mr Locke said pointedly that 50 years from now, China “does not want the world community to lay blame for environmental catastrophe at its feet.”

Despite the approach of UN-sponsored climate-change talks in Copenhagen in December, America and China—the world’s biggest contributors to global warming—show little sign of consensus. A visit by Mr Obama himself to China, which is likely to take place not long before the Copenhagen conference, may help focus minds. A conjunction of them is harder to imagine.

China and America: Doubled up | The Economist

Barack Obama’s campaign slogan “change” does not seem to apply to America’s dealings with China itself

quote of the month.

What’s on the Table at the U.S. China Strategic and Economic Dialogue (S&ED)?
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Rachel Ziemba and Adam Wolfe | Jul 24, 2009

U.S. officials and their counterparts from the country’s largest creditor, China, will take place next week in the latest of a summer full of key bilateral and multilateral meetings. In the run up to the G20 meeting in April, speculation about a “G2” consisting of the U.S. and China alone attracted a lot of attention, with many analysts noting that cooperation and compromise from the U.S. and China was needed for global progress on trade, climate change, global imbalances and a range of strategic issues. While a formal partnership between China and the U.S. along the lines of a G2 is unlikely, the two countries are expanding the topics on the agenda of their formal dialogue.

The first meeting of the a new bilateral dialogue, the Strategic and Economic Dialogue (S&ED) will be held next week in Washington, DC, bringing together both countries’ top economic and geostrategic leaders. What is on the agenda says a lot about the priorities of each government, but what’s not included may say more. As usual, the countries will focus on some of the areas on which they agree (short-term responses, big-picture ideas) with some thorny issues kept for the future. By formalizing these discussions, disagreements can be pushed through back channels, raising the prospect that some agreements may be reached before or as Obama visits Hu in China later this year. At the same time, one key goal of the S&ED under Obama is to make the dialogue less about deliverables and more about the ongoing contact between officials and their aides.

During the Bush administration, U.S. and Chinese economic officials met twice annually for the Strategic Economic Dialogue (SED) to discuss a range of issues. Initially, expectations for these meetings were high, though they faded over time. Secretary Paulson hoped to broaden the dialogue rather than fixate solely on the level of the RMB. The cooperation delivered some victories, including cooperation on food safety and small steps towards a bilateral investment treaty. The new grouping between the U.S. and China will meet annually and will take on a new set of issues – geostrategic as well as economic.

President Obama will address the meeting on Monday morning, before a session on cross-cutting issues commences. Climate change is expected to be the main topic of the first session, a move supported by the U.S. Senate Foreign Relations Committee. Climate change was an issue that was slightly out of the remit of the more economically-focused SED, but outcomes may be limited here given the diverging priorities . While both sides have agreed to a $15 billion joint-research project on clean coal earlier this month, progress on climate change may be limited.

After this, the strategic dialogue, to be led by Secretary of State Clinton and State Councilor Dai, will part ways from the economic dialogue, which will be led by Treasury Secretary Geithner and Vice Premier Wang. While there is broad agreement on many of the issues that will discussed in these meetings (such as China needs to boost consumption and the U.S. needs to save more), the mismatch in priorities on each side is likely to limit any substantial progress. Moreover, even if the U.S. and China are “roughly in agreement” over economic issues, as the Economist optimistically puts it, their accord stems from short-term and very long-term issues. China and the U.S. have engaged in some of the most aggressive economic stimulus policies since the global meltdown, but they may differ in their positions on exit strategies. Moreover, there is not too much agreement on how the two countries will navigate in a world where China consumes more and the U.S. becomes a bigger saver.

Chinese Priorities

Among China’s key worries is the safety of its U.S. assets. China now holds more than $2.1 trillion in foreign exchange reserves, about 2/3 in U.S. dollar denominated assets. Official U.S. data indicates that China held over $800 billion in U.S. treasury securities as of May 2009, making China by far the largest U.S. foreign creditor with its holdings equivalent to the levels of Japan and Russia combined. No wonder China (along with other U.S. creditors) is concerned about the U.S. deficit being monetized.

Zhu Guangyao, assistant finance minister, told Chinese state media that Wang will ask the U.S. to pledge to maintain the stability of the U.S. dollar. Such a pledge seems very unlikely, but Geithner is expected to deliver the strong dollar pledge he used last week in the Middle East (another region with a lot of dollar assets). Beyond that, both countries will limit what they say in public about the dollar, since too much attention to its value helps neither. Dollar weakness would mean China will be adding to, not subtracting from, its U.S. dollar holdings. The Chinese will also seek further details on how the U.S. will try to navigate its way back to fiscal sustainability. A slower than expected economic recovery could defer that adjustment, especially given the health care and other legislation wending its way through congress.

China will also likely bring up IMF reform, as it seeks a greater role in the institution’s management. China plans to buy up to $50 billion of notes to be issued by the IMF later this year. A relatively under-the-radar milestone occurred this month as the executive board of the IMF discussed the results of China’s first Article IV consultation since 2006. A semantic but significant standoff was resolved: The IMF will no longer label member currencies as “fundamentally misaligned,” a term that would require multilateral changes to bring currencies in line. But IMF reform is really an issue for the G20, whose next meeting will take place in Pittsburg. Yet, providing more funds to the IMF to loan out to emerging market economies is something they can agree on.

On the strategic side, China can be expected to bring up North Korea, but its priorities here are different that those of the U.S. While non-proliferation tops U.S. concerns on the Korean peninsula, stability is the bottom line for China. Although Beijing might not like the prospect of a nuclear armed state on its border, Beijing is more concerned about the collapse of the North Korean regime, which would unleash a flood of refugees across the Chinese border and the loss of a buffer between the U.S. forces in South Korea. Still, there has been some agreement in recent weeks on this issue, with China agreeing to sanctions on some North Korean officials, and marginal improvements toward consensus are possible.

U.S. Priorities

The primary U.S. economic goal remains economic stabilization and establishing a path for both the U.S. and global economy that will avoid a renewed weakness of growth now that the economy is getting closer to bottoming out. As a result, officials will likely talk about exit strategies to unwind the fiscal and monetary stimulus, a conversation to be continued with the G20. China will likely have to start withdrawing some of the new liquidity extended through the credit channel sooner than the U.S., but clarity about how all countries will coordinate these strategies will be key. The U.S. will likely also want to get Chinese officials on board with proposed regulatory reform. How China and other emerging market economies integrate into global regulatory institutions will influence the likelihood of future crises.

The U.S. will also likely want Chinese support not only on sanctions on North Korea but more broadly on anti-money laundering and anti-terrorist financing regulations. In particular, Chinese compromises on the treatment of tax havens like Macao were important in coming to G20 agreements.

In the long-term, both sides agree that increasing Chinese consumption is a mutual goal, even if they differ on thoughts on how to increase and nurture it. As Geithner did in Beijing last month, he will suggest that his Chinese counterparts to adopt policies that will shift China away from investment- and export-led growth and toward domestic consumption. As noted by the U.S. Treasury in its annual report on exchange rates, last issued in April 2009, the Chinese fiscal stimulus is a good start but more significant policy steps are needed to reduce structural incentives to save in order to reallocate funds across the economy from state owned enterprises to households.

New healthcare measures in China are a good sign (though who will pay for them is not clear) but expanding China’s social-safety patchwork is needed for consumption driven growth. For now consumption incentives have supported retail and auto sales, but the bulk of Chinese government spending has gone to infrastructure projects. The desire to limit unemployment have contributed to export rebate extensions and policies which add to production overcapacity. The U.S. is likely to push for faster reforms, but the China looks prepared to go slowly. Everyone will agree that these changes take time. Despite the fact that China’s underlying domestic demand may be stronger than many anticipated, the Chinese consumer (and those in other emerging economies) are not ready to take up the baton from U.S. consumers any time soon.

While the U.S. would like a stronger and more flexible exchange rate policy from China, that might conflict with the other item on the agenda: keeping China from reducing its U.S. dollar purchases. The increase in China’s reserves (a whopping $140 billion adjusted for valuation in Q2) and U.S. dollar holdings, suggests that moving away from U.S. assets is an issue for the next few years. China’s shift to the short end of the treasury curve is a key vulnerability for China, however. Focusing on the most liquid of U.S. assets means that China could more easily swap among U.S. assets should markets improve or, when demand requires, use such assets to buy stakes in resource companies as premier Wen suggested this week. Yet the Chinese desire for a stable currency will limit diversification as it has done in 2009 so far. Chinese steps towards internationalizing the renminbi seem to be an issue for the next decade rather than the next year. Use of the RMB in trade is still very limited.

Climate change, a major policy agenda for the Obama administration, will be high on the U.S. agenda. While both the U.S. and China, as the world’s largest carbon emitters, have made some meaningful steps in the recent past on this issue, both accuse the other of trade protectionism. The U.S. believes that China is trying to protect its renewable-energy industry and China worries that the climate change bill that recently passed the U.S. House will lead to onerous import taxes on carbon-intensive goods. China, India and other emerging markets are wary of committing to long-term emissions-reductions targets, arguing that advanced economies that had the luxury of polluting in their mid-stages of development should bear the highest cost. Thus any bilateral and multilateral agreements on this issue may be watered-down. But the U.S. and China are likely to avoid the sort of public rift exposed between the U.S. and India on the issue last week. One area of possible cooperation is technology transfer, though this, too, may be an issue for the future. More green technology production could create jobs in both the U.S. and China.

On the strategic side, cooperation on Iran and Afghanistan/Pakistan will be U.S. priorities. On Iran, China is unlikely to offer much help for U.S. priorities (Russia could be more of a help or hindrance there) but there may be room for further agreement on Afghanistan/Pakistan issues, as China fears instability in Pakistan. As Secretary Clinton did during her February trip to China, U.S. officials are unlikely to make human rights a focus of debate. While the recent Xinjiang riots will almost certainly have to be addressed, U.S. officials are likely to try to sidestep them.

What’s Not on the Agenda?

Most notably missing is trade. Both sides have indicated that a discussion of trade policies will largely be delayed until the fall meeting of the Joint Commission on Commerce and Trade. Both the U.S. and China have pointed to what they see as trade protectionism from their counterparts in recent months. Trade tensions have risen in the economic downturn, with the U.S. filing new complaints at the WTO and both sides including protectionist measures in their stimulus bills. Deferring this issue given the disagreements is a way to make time for discussions with more potential. However, such meetings have been provided a platform to launch trade steps like improved food-security screening in the past. This delay would also suggest that hopes for a revived Doha multilateral trade round may be overly optimistic.

Development assistance policies may also be left to a future date. Chinese foreign aid to Africa, Central Asia and Latin America has been on the rise, often as part of larger loan and investment packages. It also increasingly plays a key role in UN peacekeeping missions. The U.S. is about to kick off discussions of a new foreign assistance act that may boost the size of US AID, but the institution remains without a director. Greater cooperation may be in the future though, and could be an area where the U.S. and China, along with other donors, cooperate. The U.S. also has concerns about growing Chinese resource investment in developing economies.

Military issues are also off the table. Although China’s growing military power has sparked U.S. allies in Asia (especially Australia) to adjust their strategic policies, both sides prefer to keep this discussion limited to professional military personnel (and out of the hands of politicians) for now. In June, high level military-to-military talks resumed for the first time since last October, when Beijing suspended talks to protest U.S. arms sales to Taiwan. The easing in ties between Taiwan and China may provide an opening. There have been frequent naval skirmishes between China and the U.S. in 2009, but neither side wants to escalate the issue.
RGE - What?s on the Table at the U.S. China Strategic and Economic Dialogue (S&ED)?