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A Weighty U.S.-China Dialogue

Authors: Elizabeth C. Economy, C.V. Starr Senior Fellow and Director for Asia Studies, Council on Foreign Relations Adam Segal, Maurice R. Greenberg Senior Fellow for China Studies and Director of the Digital and Cyberspace Policy Program Evan A. Feigenbaum Steven Dunaway
May 21, 2010

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The next round of the U.S.-China Strategic and Economic Dialogue (S&ED), set for May 24-25 in Beijing, occurs at a time of global nuclear concerns, a security crisis in Northeast Asia, and concerns over the widening fallout from Europe's financial troubles. The large U.S. delegation will include Secretary of State Hillary Clinton, Treasury Secretary Timothy Geithner, and Federal Reserve Chairman Ben Bernanke. China's delegation will be led by Vice Premier Wang Qishan and State Councilor Dai Bingguo.

CFR Senior Fellow Evan Feigenbaum says Clinton rightly has chosen to prioritize North Korea, Iran, and the situation in Afghanistan and Pakistan in her talks. But he is skeptical about how much common cause Washington can find with China, especially on implementing sanctions. Senior Fellow Adam Segal says China's policy of "indigenous innovation," which has raised U.S. protectionism concerns, will command attention but likely yield little change in policy. Similarly, Steven Dunaway says currency valuation will be discussed intently behind closed doors but it is not clear if or when China will be ready to revalue. Elizabeth Economy says the dialogue can be an important forum for sharing ideas and best practices in areas like clean energy technology, but these meetings should not be expected to deliver concrete results. --Robert McMahon, Editor, CFR.org

Elizabeth C. Economy, C.V. Starr Senior Fellow and Director for Asia Studies, Council on Foreign Relations

One of the few bright spots in the U.S.-China S&ED and its predecessor (the Strategic Economic Dialogue) has been the bounty of cooperative projects on energy and the environment that is announced at each set of talks. Scores of initiatives, action plans, partnerships and programs have been laid out over the past few years.

In President Barack Obama's first year, the United States has announced joint efforts on green buildings, energy efficiency, consumer product standards, smart-grid technology, and electric cars, among others. The only question that remains is whether any of these ventures will actually materialize. For instance, the energy efficiency action plan announced during the Bush years has spawned workshops, but concrete accomplishments are difficult to discern.

To the extent that we educate each other on best practices and support implementation of clean technologies, we all win. Yet the emphasis on announcing deliverables ... undercuts the very real, if somewhat limited, value of such dialogue.

Cooperation beyond the occasional workshop or conference is hard. Expectations often differ concerning who will bring the money to the table. Information, such as actual energy consumption or emissions at the factory level, that is dispensed freely in the United States may be difficult or even impossible to access in China (and, more rarely, vice versa). Beijing and Washington might agree that a demonstration project in a given province is just the ticket, but a local official might not want the attention such a project would attract. Even issues of capacity can doom an otherwise well-conceived initiative. China is still developing its community of energy and environmental experts, and the most talented sometimes appear overwhelmed by the sheer number of cooperative opportunities they are offered; there simply aren't enough hours in the day.

Unfortunately, the road to true project-based cooperation is likely to become only harder. Even as American and Chinese clean technology companies tout the opportunities of clean technology investment in each other's home field, my colleague Adam Segal suggests in his discussion of indigenous innovation that China is not quite ready to play ball. Indigenous innovation—whether as a set of policies or as a mindset--takes clear aim at clean technology as one of the several emerging technologies in which Beijing seeks to limit the ability of foreign companies to invest and sell in China. This is not the path to a cooperative clean-energy future.

None of this is to argue that the two countries shouldn't push forward on energy and environmental cooperation. The future health of our planet will depend in large measure on how China and the United States manage their respective development paths and environmental futures. To the extent that we educate each other on best practices and support implementation of clean technologies, we all win. Yet the emphasis on announcing deliverables, which may or may not actually be realized, undercuts the very real, if somewhat limited, value of such dialogue. We should perhaps remember that the Strategic and Economic Dialogue is just that and no more.

Adam Segal, Maurice R. Greenberg Senior Fellow for China Studies and Director of the Digital and Cyberspace Policy Program

When the phrase "indigenous innovation" was first introduced by the Chinese government in a 2006 guideline for long-term science and technology development, it mainly attracted the attention of a small cadre of China observers. Many wondered if the first couplet in the original Chinese, zizhu chuangxin, should be translated as autonomous, homegrown, or independent.

Next week, indigenous innovation will be the skunk at the S&ED party, a primary concern of the American business community and the U.S. government--Treasury Secretary Timothy Geithner, Deputy Secretary of State James Steinberg, and United States Trade Representative Ron Kirk have all called Beijing out on the policy in the last two weeks.

[T]he United States may actually get some deliverables on indigenous innovation. But it can expect backsliding without change in the terms of debate over technology within China.

Indigenous innovation is a particularly difficult challenge for the United States because it is both a set of specific polices and a technological mindset. With over a dozen U.S. cabinet members and agency heads attending the dialogue, the Obama administration is likely to get some traction on some of the components of indigenous innovation--preferential procurement policies, local content requirements, and directives to reveal encryption codes--that are raising concerns among U.S. businesses. Yet techno-nationalism is widely entrenched in the Chinese government, so any successes announced at the conclusion of the S&ED are likely to be ephemeral. Under the mantra of indigenous innovation, old polices will be replaced by a new menu of programs designed to reduce Chinese dependence on foreign technology, develop an alternative set of Chinese technologies, and eventually create national champions--a Chinese Intel or Microsoft.

So far, the U. S. side has had difficulty defining the goals of the overall dialogue. At times, senior officials have suggested they are meant to produce concrete deliverables. Alternatively, they have said the talks have the larger goals of defining common interests. Deputy Secretary Steinberg said earlier this month the United States hopes to shape the debate within China by using such meetings as an "action-forcing event to help us move forward on some issues to kind of crystallize the attention of leadership." In contrast to other issues likely to be raised by U.S. officials at the S&ED, such as revaluation of China's currency or increasing pressure on North Korea to return to denuclearization talks, the United States may actually get some deliverables on indigenous innovation. But it can expect backsliding without change in the terms of debate over technology within China.

Evan A. Feigenbaum

Dialogues work best when they're kept small and focused. With as many as sixteen U.S. agencies represented at this S&ED, it's easy to see how the dialogue could quickly degenerate into a three-ring circus of speeches, plenaries, press gaggles, swan centerpieces, and fancy flower arrangements.

But Secretary Clinton has some especially tough foreign policy issues on her plate.

Her first challenge is to prioritize. The good news is that she has apparently put three issues--Iran, North Korea, and policies toward Afghanistan and Pakistan--at the top of her list.

Her second challenge will be to throw nearly everyone else out of the room, handling these issues as privately as possible with her counterpart, State Councilor Dai Bingguo, and other Chinese leaders.

China's enforcement of sanctions--its record on North Korea is uneven--may test the relationship [with the United States] further.

On Iran, the administration has gotten traction with Beijing. Clinton announced this week that she had secured Chinese (and Russian) support for a sanctions resolution.

But China's enforcement of sanctions--its record on North Korea is uneven--may test the relationship further. And since it's hard to imagine that a Security Council resolution, in itself, will halt Iran's progress, Beijing may face tougher choices six to nine months down the road. For example, without waivers from U.S. sanctions that could be imposed by the Iran legislation moving through Congress, the interests of Chinese energy, trade, and financial institutions will be affected.

On North Korea, Clinton arrives in the midst of a crisis. South Korea just presented forensic evidence that a North Korean torpedo sank its 1,200-ton corvette, Cheonan. And China probably wishes the whole thing never happened, not least because Seoul (and to some extent, Washington) will argue that Beijing has enabled Pyongyang's provocations by shielding it from international pressure. Clinton will need to sit much harder on Beijing if China is to sit harder on North Korea. After more than a decade of overtures to South Korea, China's ambivalence on the incident will undermine much of the progress it made in relations with Seoul.

Finally, there is "AfPak." China is a major investor and donor to Afghanistan, but has done little to coordinate with Washington. Meanwhile, U.S. messages to Islamabad--to get tough on extremism and crack down harder on Pakistan-based terrorist groups--would be more effective if complemented by similar Chinese messages. The president's national security advisor, General James Jones, has said that China "could do more." But Clinton's problem is that China simply does not share U.S. threat assessments. China has other interests that obstruct cooperation with Washington, not least sustaining a historically close relationship with Islamabad to create countervailing pressures against India.

Steven Dunaway

The economic side of the U.S.-China discussions will continue to focus on what can be done to make further progress in correcting imbalances. The key issues that will be discussed in this context are China's exchange rate and trade policies.

The United States will make a firm private push on the exchange rate issue, urging China to allow the yuan to begin to appreciate again. Publicly, however, the U.S. authorities will continue to maintain a low profile on the issue to avoid being seen as overly pressuring their Chinese counterparts. Public statements by U.S. officials will follow the line taken by Secretary Geithner during his May 18 visit to Washington State that China believes that it is in the country's best interest to move (Bloomberg) and the United States is confident that at the right time China will allow its exchange rate gradually to appreciate again.

[B]ecause of the recent economic turmoil in Europe and the depreciation of the euro the Chinese authorities think that the "right time" for a currency move may be later, while Washington continues to believe sooner is better.

The problem is that because of the recent economic turmoil in Europe and the depreciation of the euro, the Chinese authorities think that the "right time" for a currency move may be later, while Washington continues to believe sooner is better. It is not clear what may come out of the discussions to provide a clue as to how this conflict may be resolved.

Regarding trade policy, the main concern on the U.S. side is access to the Chinese market. The key issue here is government procurement given China's new "indigenous innovation" program, but there are broader concerns about increased discriminatory treatment of foreign firms in China. On the Chinese side, there are concerns about market access as well with the rising number of U.S. antidumping and countervailing duty cases against imports from China. The Chinese are also likely to raise again old complaints about U.S. restrictions on high-tech exports limiting trade between the two countries. Any progress on these issues is likely to be only incremental and difficult to discern.

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