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China-US Strategic and Economic Dialogue, An Arm's Length Embrace
   2015-06-30 20:21:50    CRIENGLISH.com      Web Editor: Zhang

By Zhao Yang & Einar Tagen

Senior Chinese and U.S. officials have wrapped up their two-day high-level Strategic and Economic Dialogue (S&ED) talks in Washington to deepen cooperation with regards to strategic and economic issues and further promote people-to-people exchanges. US Secretary of State John Kerry said the United States welcomes China playing "a responsible role in world affairs."

Kerry noted that, "The dialogue that we have engaged in here over the course of the last two days and one night really reflects a joint US-China commitment to cooperate in areas of common interest and to seek constructive solutions where we have our differences. The United States, I want to re-emphasize, welcomes the emergence of a stable, peaceful, prosperous China, that plays a responsible role in world affairs."

From the Chinese point of view, as voiced by Vice Premier Wang Yang, maintaining a strategic dialogue has helped the US and China effectively manage differences and minimize the impact of such differences on the relationship. Some may recall the proposal in the US, a decade ago, to impose a 27.5 percent punitive tariff on Chinese imports. Fortunately, both sides chose dialogue over confrontation and worked together to forestall a looming trade war.

Bilateral Investment Treaty (BIT)

US Treasury Secretary Jack Lew said both sides had committed to work more towards a Bilateral Investment Treaty, already seven years in the making, and said China's pledge to limit intervention in currency markets was an important step. China has also pledged to further liberalize exchange rates, open capital markets and expand access to foreign financial service firms. This is in line not only with promoting more global trade but also China's desire to internationalize its currency, the Renminbi (RMB).

This year is a big one for progress on a potential BIT. Both China and the United States exchanged their "negative lists" separate lists of sectors that will be exempt from the BIT and thus maintain restrictions on foreign investment at BIT talks last week. The BIT has been a major feature at previous S&EDs C the shift towards substantial negotiations was announced at the 2013 round of talks, while at the 2014 S&ED, negotiators laid out a timetable for finishing talks on the framework and moving to negative list negotiations.

The negative lists are likely to be the thorniest part of such negotiations. China, like many countries when negotiating trade agreements, wants to protect some sectors C from agriculture to manufacturing to services like insurance C from foreign competition by placing restrictions on investment. For China's point of view, this is necessary in order to give Chinese firms a much-needed leg-up against more developed competition. For U.S. firms, it represents an unnecessary barrier to entry. Talks regarding the negative lists and the BIT in general will be a major focus on the "economic track" of the S&ED.

Progress on a BIT is also complicated by the US efforts to negotiate the Trans Pacific Partnership (TPP), which excludes China. After an initial rebuke for "fast track" authority, which would allow an up-or-down vote on any negotiated measures, Obama was able to reach a deal on this last week. If the US was able to finalize a TPP, it would give the US greater leverage in negotiating a BIT with China.

The take-away for businesses is to look carefully at the existing and proposed trade frameworks and see where the opportunities lie. As China internationalizes the RMB, the country will cut FOREX risk for those who use it to their advantage. As always, those who react quickest to change will reap the greatest benefits.

Climate Change

Climate change returned to the agenda of US-China relations in a big way last November, when US President Obama and Chinese President Xi Jinping unveiled joint commitments on emissions reductions as part of Obama's visit to China. On climate change action, both sides seem to be gearing up for a joint announcement at the Paris Climate Change Talks, which will take place in December. As the world's two main polluters, the US and China are regarded as the key to global leadership on this front.

With China already 5 years ahead of a number of its climate change goals, the pressure seems to be shifting to the US to be more aggressive. It is expected that President Xi and President Obama will announce a set of stronger measures as part of Xi's September State visit to the US. Climate issues will continue to adorn the front page of newspapers worldwide. Tempering this from the US side is a concern that the election of a Republican "climate change skeptic" could blunt the force of any future commitment from the US.

From a business perspective, those with pollution abatement solutions should be gearing up as more regulation and investment migrates towards this issue. Those manufacturers who will be the targets of these changes should be looking to get ahead of the game by studying cost-effective solutions and the geography of their primary manufacturing.

Cyber Security

Cyber security is an ongoing area of tension between the powers. The question is; do problems related to cyber security constitute legitimate security issues or are they merely political theater? US claims about the Office of Personal Management hacking have yet to be substantively linked to the Chinese government, and in view of the Snowden and Wiki leaks revelations, including the most recent ones concerning the cyber hacking of the last three French presidents, it will be difficult for the US to press this without looking hypocritical. However, China's announcement at the S&ED that it will cooperate with other nations on a cyber-hacking review may be a first step forward. Given the fact that the US holds clear superiority in the field, it is doubtful that America will give up its strategic advantage.
Businesses should as always take steps to secure sensitive information, but be aware that anything on the net is vulnerable. Those corporations which provide cyber security solutions to governments and private business will continue to enjoy large profits, even as they scramble for increasingly expensive human resources.

International Issues and Nuclear issues

The two countries also share concerns about nuclear issues in Iran and the Korea Peninsular, the fight against Islamist militancy, and support for global development. While these represent areas of joint concern, the US interventionist and Chinese non-interventionist approaches are difficult to reconcile. Expect some sort of cooperative announcement when President Xi and President Obama meet in September.

North Korea has become an increasingly complex issue as China is joined by Russia in resolving to keep US military interests out of North Korea. The ongoing tension between the US and Russia has heightened the political stakes. For China, a nuclear North Korea is also a crucial issue. For business, this is a major long term political risk issue, as a nuclear arms race in the Middle East or Asia would be destabilizing to trade and global peace and poor countries with weak political institutions and nuclear triggers could be the catalyst for cataclysm.

Territorial Issues

During what both sides referred to as "candid" and "frank" exchanges at the S&ED, China and the US restated their divergent positions on China's pursuit of territorial claims in the South China Sea. It is clearly one of the principal causes of deteriorating trust between the world's two largest economies. The US has favored a two-pronged approach, namely, use of the international press to paint China as a land grabbing bully; and use of its military, sending ships and planes into disputed areas, while insisting it has taken no stance on the underlying territorial issues. China continues to maintain its historical rights, but declared that its island building phase has come to an end.

For the US, this is part of a containment strategy, which would give it and its allies, particularly the Philippines, strategic control of shipping lanes in the South China Seas. China, as a nation dependant on trade imports and exports with its own historical claims, is not in a position to accept this. But the ability of the two sides to put aside differences on maritime security led to China and the United States to state that they are stepping up cooperation with regards to ocean preservation.

Chinese State Councilor Yang Jiechi points out that as one of the world's ocean powers, China is moving to prioritize the ocean in its national development strategy. Yang stated, "The Chinese government attaches great importance to international maritime cooperation. We're dedicated to working with countries around the world on maintaining maritime security and developing the marine economy. Our goal is to promote and develop a green ocean that is filled with harmony and cooperation." Yang also added that China and the US have broad common interests in global maritime governance, expressing hope that both countries will build on the progress achieved to turn ocean protection into a new area of growing bilateral cooperation.

Western political analysts have so far paid a lot of attention to China's Belt and Road initiative, the Asian Infrastructure Investment Bank (AIIB), the Silk Road Fund and the BRICS Bank. They say in addition to opening a Silk Road land route, which will make the United States' South China Sea containment strategy irrelevant, these moves are challenging the traditional financial and political institutions which have been in place since the US backed Bretton Woods agreement was put into place after the Second World War.

In essence, the US in its drive to maintain a world order that saw it become the dominant super power, has pushed a rising China to create an alternate order; more conducive to a multi-polar emerging reality. While the South China Sea issue is just part of this, it is probably the best focal lens to gauge the realities of this complex relationship.

President Xi Jinping's September State visit

In addition to the macro issues, this S&ED should be viewed not only in the context of those issues on and under the table, but as preparation for President Xi Jinping's state visit to the United States in September. Both sides are endeavoring to keep the agenda positive and focus on areas of mutual benefit while sidelining points of contention. Depending on Obama's progress with the TPP, this may be the visit which brings the US-China Bilateral Investment Treaty (BIT) to fruition. At the very least, the visit will definitely bring forth a renewed emphasis on climate change. Cyber security and territorial dispute issues will probably continue, but security and nuclear issues may also be areas where the two countries can reach agreement.

In the midst of change and friction, the fact that China and the US can agree on some issues and agree to disagree on others means that there remains a high level of hope, and that this year could be a big year for China US relations.

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