CHINA AND AMERICA CAN BUILD AN AGENDA FOR SUCCESS Fred Hu
Wednesday, May 23, 2007
In sharp contrast to the euphoria in the run-up to the inaugural China-US strategic economic dialogue held in Beijing last December, the mood is subdued as Wu Yi, Chinese vice-premier, meets her US counterpart, Hank Paulson, Treasury secretary. It seems doubtful that the second dialogue will achieve much, let alone ground-breaking results.
That would be unfortunate for everyone. An impatient, Democrat-controlled US Congress would dismiss the dialogue as a meaningless talking shop, and could reintroduce shelved tariff-raising measures to punish China for its failure to appreciate its currency or reduce its trade surplus with the US.
The dialogue, Mr Paulson's brainchild, departs from the US penchant for hectoring and advocates constructive dialogue to manage China's economic rise. Mr Paulson also attempts to shift the focus away from any single issue to a broad set of fundamental policy reforms that would move China farther along the path of free markets. It is a promising initiative. The question is, will China's leadership embrace it?
So far, Beijing has done so. President Hu Jintao has grasped the significance of this unprecedented initiative. The risk, though, is that US political support for the dialogue could quickly dissipate if the Bush administration does not deliver concrete results.
On the Chinese side, there are several areas where it should commit to fast action. The first is greater currency flexibility.While the exchange rate is not the magic bullet as widely touted, it is an essential element in redressing global imbalances.Given congressional obsession with the renminbi, China will find its interests best served by removing the issue as a nagging irritant. China should also commit to making the People's Bank of China independent. The bank is beholden to the state council and wide-ranging bureaucratic influence with little power to set interest rates or exchange rate policy. This is a key reason why China has been slow in undertaking currency reforms.
Second, speed up liberalisation of trade and investment. China should strengthen intellectual property rights and reduce still considerable barriers to foreign entry into the service sector. While China's import tariff rates are already the lowest in the developing world, it should consider further cuts to bring the average down to the level in the most developed nations. To narrow the Sino-US bilateral trade deficit, China should eliminate value-added-tax rebates for exporters altogether and exercise voluntary export restraints.
Third, China should accelerate financial reforms. China may be a world- beating manufacturing juggernaut, but it is a financial minnow. China has had success in banking reform in recent years, but capital market reforms have lagged behind. The speculative frenzies, tight administrative control over security issuance, rampant insider trading all reveal severe deficiencies in its markets. Developing a domestic bond market should be a top priority and China should also embark on capital account liberalisation.
Finally, China should surprise its US hosts by announcing the intent to impose emission standards and carbon targets. The Bush administration has pathetically used China's exemption from the Kyoto protocol as an excuse not to act. By taking leadership responsibilities, China could spur an agreement on emissions reductions.
If, in the dialogue, China puts on the table a credible policy package as outlined above, it could force the US to act to improve its own record.
First, the US should relax or discard its outdated export control regime, a relic of the cold war. This has made it almost impossible for US companies to export advanced capital and technology-intensive goods that the US is most competitive at, and where China's demand is greatest. The result is a lopsided trade relationship heavily tilted in China's favour that denies the US a dominant place in the world's biggest export bonanza for capital goods.
Second, the US should do more to contain protectionism. The blatant blockage of the bid for Unicoal by the China National Offshore Oil Company sent a disturbing signal. If it expects the emerging China to practise free trade, it must set the right example.
A stable and constructive China-US relationship benefits the two countries and the world. Mr Paulson has provided a strategic framework to manage the challenges. Much is at stake. China and the US must seize the moment to ensure a successful dialogue.
The writer is a professor at the National Centre for Economic Research in Beijing and a managing director at Goldman Sachs.
