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Maintaining Forward Momentum in U.S.-China Economic Relations

Henry M. Paulson, Jr. (US Treasury)

Henry M. Paulson, Jr. (US Treasury)

Secretary of the Treasury Henry M. Paulson, Jr.

Asia Society Washington, DC Center
December 5, 2007

Good morning. Thank you, Bill, and thank you to the Asia Society for the opportunity to be with you today. Let me also thank the Society for your long, productive history of leadership in strengthening relationships among the United States and Asian nations.

My previous remarks leading up to next week's meeting of the U.S.-China Strategic Economic Dialogue have focused largely on the dynamics which led to the creation of the SED and my vision for the future of the U.S.-China economic relationship. I will briefly touch on those issues today, and also on the misconceptions in that relationship that are influencing the rise of protectionism and economic nationalism in both nations.

The Foundation of the Strategic Economic Dialogue

In recognition of the importance and complexity of the U.S.-China economic relationship, a year ago September President Bush and President Hu created the SED. Their intent was not to replace the many economic dialogues already taking place, but to create an over-arching, senior level forum that was both comprehensive and strategic. The goals have included creating work plans to achieve shared objectives and building trust on both sides by demonstrating progress on the immediate issues we face.

The Strategic Economic Dialogue has made substantial progress in achieving these goals. Over the last year, we have built stronger relationships and established constructive channels of communication that didn't previously exist. These innovations have helped keep the U.S.-China economic relationship on an even keel and helped us manage difficult issues, even in times of tension. Because we have a framework for senior-level dialogue, we can—and do—pick up the phone and we talk. We work towards solutions, which can only be reached when there are mutual benefits.

The SED meeting next week in Beijing will focus on five areas. They are: integrity of trade and product safety; balanced economic development, including financial sector reform; energy efficiency and security; environmental sustainability; and bilateral investment. The meeting comes at a delicate time, as a new group of leaders move into China's most senior positions. We look forward to working with the Chinese leadership team to ensure that the SED process continues to be an effective mechanism for promoting our shared interests and responsibilities. We will also thank our retiring colleague, Madame Wu Yi, who is an extraordinary representative of her country.

Through economic dialogue, we have achieved concrete and significant results, including a civil aviation agreement, greater market access in the financial services sector, expansion of U.S. exports, and enhanced energy security and environmental protection. We would not have accomplished what we have without the specific framework of a focused and strategic economic dialogue, and we can accomplish more.

A Broader Bilateral Economic Agenda

Through the SED, we have broadened our bilateral economic agenda to include food and product safety, energy efficiency and security, and environmental sustainability. All three carry deep implications for our economic ties.

American consumers need to have confidence in the safety of the products they purchase, whether produced at home or abroad. China's management of food and product safety issues will have a long-term impact on our trade relations, the sustainability of China's growth strategy and its further integration into the global trading system. U.S. and Chinese government agencies have been working together to address these safety issues—a hallmark of the constructive, cooperative and candid nature of our broader relationship.

For both our countries, greater energy efficiency and security requires reliance upon market price signals, technology, innovation, and diversified energy sources. The Global Nuclear Energy Partnership, clean coal development through FutureGen, and industrial efficiency audits represent some of the best areas of on-going cooperation.

We also encourage China's active participation in the Major Economies Meeting efforts to develop a post-2012 framework for greenhouse gas reduction. I was pleased to see that a large Chinese energy company, Shanghai Electric, recently indicated public support for substantial reductions in greenhouse gas emissions.

Balanced Economic Growth and China's Exchange Rate

One of the most pressing and important issues—for the United States, China and the global economy—is China's move to a more flexible exchange rate policy. China is reforming its policy, as a part of a movement to a more market-determined exchange rate. The pace of reform has accelerated. In the past year the RMB has appreciated by six percent, but the pace is still not fast enough to reduce China's global trade surplus, its internal imbalances, or foreign exchange market pressures.

A more flexible currency is especially important now, when the risks of inflation are clearly rising in the Chinese economy. Increased currency flexibility would allow China's central bank to use the powerful tool of monetary policy for China's financial and price stability. As Premier Wen Jiabao recently emphasized in a speech in Singapore, China must now undertake comprehensive measures to control mounting inflation, growing asset bubbles, and an overheating economy. We share the concerns of China's top leaders on this issue.

The Rise of Economic Nationalism

In the U.S.-China relationship, the RMB exchange rate has become more than an economic parameter; it has become a touchstone for broader anxieties about competition from China. As globalization has advanced and economies have become more tightly integrated, worries about the effects of foreign competition—through trade or through foreign investment—have led to a rise in economic nationalism and protectionist sentiments. U.S. and Chinese leaders both face this challenge.

Many Americans worry about losing jobs to low cost manufacturing or assembly in China. Some worry about losing our economic pride and leadership. There is fear that, due to China's rise, we will no longer be stewards of our own economic future.

We have been through this very type of debate before. Twenty years ago, we were gripped by fear that Japan would overtake our economic leadership—a concern that was unfounded then and, in hindsight, looks profoundly mistaken.

These misconceptions in the U.S.—both then and now—reflect a fundamental lack of confidence in the American worker. And they couldn't be more wrong. America continues to lead the world in standard of living, productivity, and innovation. China's continued economic growth and integration into the global economy gives us even greater opportunities to grow and succeed. In fact, the bigger risk to both U.S. and Chinese prosperity is that China's growth stalls or China pulls back from its path of further integrating into the global economy—that it reforms too slowly, rather than too quickly.

The rise of economic nationalism is occurring not only in the United States, but also in China.

Some in China are suspicious that the U.S. push for RMB appreciation and financial market liberalization is really an attempt to gain trade advantages and generate profits for American companies while slowing China's economic expansion. They mistakenly believe that yen appreciation during the mid-1980s caused Japan's weak economic performance in the 1990s. Rather, we now know that Japan's economic difficulties were caused by the growth, and then collapse, of a huge stock and property price bubble, and the failure to use monetary policy to prevent the emergence of deflation after the bubble burst.

Financial sector liberalization is not about foreign firms drilling holes in China's economy. Foreign participation in the financial services sector brings the expertise needed to provide more efficient savings instruments, the ability to insure against risk, and the ability to assure that China's savings flow to their most productive uses. But to bring and use that expertise—the most valuable asset a globally competitive financial institution has—the investor needs to have control over the operations of the firm in which it invests. This is why China's limits on the amount of equity that a foreign investor can hold in a Chinese financial institution are so costly to the Chinese economy, and why raising these limits is so important.

There are also those in China who argue that the U.S. focus on food and product safety is part of a strategy to restrict Chinese imports and reduce the bilateral trade deficit. This argument has no basis in fact. Our concerns are shared by numerous other countries, notably EU nations. The United States has issued recalls and import alerts about exports from many nations; our concerns about food and product safety are not targeted specifically at China.

Collectively, these misconceptions erode the political confidence we need to maintain stability in our bilateral economic relationship.

Finally, after welcoming foreign investment which contributed greatly to Chinese manufacturing growth and export competitiveness, some in China would now tighten restrictions on foreign investment to protect China's domestic industries.

Domestic protectionism is not unique to Chinese industry, as all market-driven companies welcome competition in other industries much more than in their own. The U.S. faces similar protectionist pressures, even though we are one of the most open economies in the world. I am committed to working to maintain this openness because it is good for America and for our workers. Frankly, it will be easier to do this if the American public and the U.S. Congress see that China is serious about reform and expanding access to their markets. China cannot protect its way to prosperity—protectionism harms China's industrial development and our efforts to build stronger trading relationships.

Towards a New Future for Bilateral Economic Relations

The SED is one valuable tool in combating protectionist sentiments and clarifying these misconceptions. In our actions in the SED and other bilateral dialogues, we have demonstrated that we welcome and encourage the rise of a prosperous and stable China. We supported China's membership in the WTO, the Inter-American Development Bank and the Financial Action Task Force. We have also supported a greater voting share for China, and other rapidly growing emerging markets, in the IMF and the World Bank. It is also important for Beijing to recognize that, while increased participation allows China to advance its interest, greater participation also brings greater responsibilities.

The agreements we have achieved thus far are like signposts showing progress along the mutually-beneficial economic road. While progress has not been as rapid as we would like, these signposts point the way to further benefits for the American and Chinese people. To turn back on, or away from, this road would jeopardize our long-term strategic interests for short-term political expediency.

To succeed, the steps and policy actions must make sense to both sides. That is the purpose of economic dialogue, to listen openly to China's views and, in return, they listen openly to ours. I am ever mindful of the complexity of working with a sovereign economic partner upon whom we rely, and who relies on us, to urge them to take difficult, internal actions which we believe are economic imperatives. It is economic diplomacy, writ large, which has potential, perhaps far beyond what we can envision today, for greater global economic prosperity.

Thank you, and I am pleased to answer your questions.