November 27, 2007
HP-695

Remarks by Ambassador Holmer at the Center for
Strategic and International Studies on Establishing
New Habits of Cooperation in U.S.-China Economic Relations

Good morning. I want to thank Charles Freeman for inviting me today. I sincerely appreciate the efforts of CSIS to create a forum about China that merges economic, political and security issues. This is an important service to policymakers, businesspersons, and scholars.

China's re-emergence on the global stage is one of the most consequential geopolitical events of recent times. There is hardly an issue – from trade, to national security, to climate change – or a place – from North Korea to Iran to Sudan – where American and Chinese interests do not increasingly overlap. Because China is so fully integrated into the global economy, what happens in China's economy affects the entire international community.

The U.S.-China economic relationship is entering a new phase.

First, U.S.-China economic interdependence is deepening. We need each other more and on a broader number of economic and economically consequential issues. Over the past 5 years, according to U.S. data, U.S. exports to China have grown from $18 to $52 billion, while U.S. imports from China have grown from $102 to $287 billion.

Moreover, the United States and China are shaping, and being shaped by, global energy and environmental trends, which have strong economic consequences. For example, our countries are the world's largest energy consumers and the largest emitters of greenhouse gases. Clearly, our interdependence is deepening.

Second, whereas trade and investment were once largely a source of stability in bilateral relations, they are now increasingly also a source of tension. Such tensions are straining the domestic consensus in both the United States and China on the benefits of economic engagement.

When I first became deeply involved in international trade issues in the 1980s, we didn't have significant trade tensions with China – mainly because we didn't have much bilateral trade. In a sense, the fact that we have trade tensions today reflects a maturing of our relationship and the rapid growth in bilateral trade and investment. We need to make sure we manage those tensions effectively in order to keep our bilateral economic relationship on an even keel and in our mutual interests.

Anxieties about increasing trade manifest themselves in many ways, which leads me to the third dynamic confronting us: the rise of economic nationalism and protectionism in both our nations. These sentiments may constrain leaders from adopting policies that are in the long-term interests of the citizens and economies of the United States and China.

These three emerging dynamics to our economic relationship – deepening interdependence, a strained policy consensus, and the rise of economic protectionism – are mutual and require cooperative solutions.

These dynamics informed the creation of the Strategic Economic Dialogue (SED) by President Bush and President Hu Jintao in 2006. They envisioned a forum to allow both governments to communicate at the highest levels and with one voice on issues of long-term and strategic importance.

Managing our complex and increasingly interdependent relationship is daunting – and requires speaking to the right people – at the right time – on the right issues – and in the right way.

I learned a long time ago that if you are going to be successful in any kind of dialogue, it is essential that you do everything you can to put yourself in the other person's shoes, to try to see the world the way he or she does. This is the way you achieve win-win agreements, ones that advance mutual interests, agreements that will withstand the tests of time. The Strategic Economic Dialogue embraces this approach.

The United States has three core objectives for the SED as a new and leading institution in U.S.-China relations.

First, through this framework, we are advancing the U.S.-China economic relationship by establishing new habits of bilateral cooperation.

We have embraced a broad agenda that covers cross-cutting economic and economically consequential issues, including regulatory transparency, energy conservation, environmental protection, innovation, food and product safety, as well as the important economic issues of exchange rate and macroeconomic policies, market access, and financial sector development and liberalization.

Our approach engages multiple and diverse government officials in both countries. It breaks down classic bureaucratic stove-pipes that hinder effective communication and impede results.

And that's what direct engagement does: it keeps the relationship on an even keel by lessening miscommunication and dispelling misperceptions so common in the history of the U.S.-China relationship.

It helps us signal to China that we welcome the rise of a confident, peaceful and prosperous China. A weak and insecure China is not in America's economic or security interests.

Second, it is vitally important that our policies accelerate the next wave of China's "reform and opening" process. The pace of China's growth and economic reform has clearly been remarkable, but continued effort is needed.

China's top leaders now realize that a key challenge they face is taking the bold policy steps necessary for an economy that is no longer in the first stages of economic growth.

We welcome the leadership's current efforts to transition to an economy that is more market-oriented, less reliant on low-value added manufacturing exports, one that depends more on the skills and resourcefulness of the Chinese people and less on material inputs and natural resource consumption.

A major risk China faces is that its government won't act quickly enough to take the policy steps necessary to deal with the economic and social imbalances created by its growth model. Without strong policy adjustments, China's economic growth path becomes unsustainable, as Chinese top leaders have publicly stated. We are encouraging key reforms that will help China manage the blistering pace of its economic growth; these include financial market liberalization and a plan for rebalancing growth. China has proven to the world that it can grow fast, but the key issue now is whether it can grow differently and sustainably, where the quality of growth is as important as the quantity.

Bold structural policies are needed to shift China's growth away from heavy industry, high energy use, capital intensiveness, and dependence on exports – towards greater reliance on domestic demand, production of services, and a greater share of China's national income accruing to China's households.

To enable market forces to efficiently rebalance the economy and spread prosperity to all the Chinese, China needs more flexible prices, including a much more flexible, market-driven exchange rate. Exchange rate flexibility is also key to allowing monetary policy – the most potent instrument for guiding an economy – to focus on assuring price and financial stability.

A key to China's future success will be its willingness to accelerate the pace of its market-based economic reforms. Meeting and going beyond its WTO commitments, resisting protectionist sentiment, and opening up its economy to greater international competition for goods, and particularly, services, will help rebalance the Chinese economy and spread prosperity more broadly among the Chinese people.

These reforms are – and will continue to be – resisted by increasingly influential Chinese businesses due to growing suspicion about U.S. efforts to encourage further liberalization of key sectors of China's economy. However, in my judgment, the greatest risk to China's long-term economic security is not that China opens too fast, but, rather, that protectionists prevail, and Chinese reforms proceed too slowly.

Third, and finally, we are also encouraging China to act responsibly as a global economic power. We welcome China into key international financial institutions and are giving China a greater voice in them as well.

Since the initiation of the SED in September 2006, we have supported China's efforts to join the Inter-American Development Bank (IADB) and the Paris-based Financial Action Task Force (FATF). We also strongly support a greater voting share for China in the IMF and World Bank.

Increased participation will allow China to advance its interests in those institutions, but it is also important that Beijing recognize the responsibilities of greater participation.

China has become a major source of foreign aid for many of the poorest countries. We look forward to working with China, as a new and welcome participant, in multilateral efforts to assure that foreign aid and lending practices promote sustainable development.

This new era in U.S.-China economic relations requires new and dynamic ways of doing business. We are meeting these challenges through the creation of the political space and the institutional capacity for long-term stability in our bilateral economic relations.

I spoke before about the importance of new habits of cooperation between our governments and our countries. While habits of cooperation are important, good process does not ensure good results.

Dialogue needs to be more than talking for the sake of talking and can not give U.S. or Chinese leaders "a pass" on issues of disagreement. It is about setting priorities, specifying consequences and fashioning practical solutions.

Sec. Paulson refers to "signposts and benchmarks" along the path toward reform. Is progress occurring as fast as we prefer or as fast as is in China's interest? No. But is progress occurring faster than would have been the case without the SED? Absolutely.

Time after time, U.S. government agencies have been able to "draft behind" the momentum created by the SED.

Examples include a new air services agreement, collaboration on energy security and the environment, moving toward more efficient capital markets, and addressing concerns about tainted food and product imports.

The SED is not just an event that happens at Cabinet-level meetings twice a year. Rather, engagement is continuous, with progress announced throughout the year.

President Bush and President Hu have set a positive agenda for strengthening our economic relationship. The SED is a core part of that agenda because it is long-term in its vision, comprehensive in its scope, and immediate in its ability to deal with the most sensitive bilateral economic tensions.

As we chart the future course of our economic relationship with China, we would be well-advised to remember the words of a former American diplomat and Chairman of the Senate Finance Committee, Daniel Patrick Moynihan, who said we shouldn't "let the politics of last month or next month affect decisions toward China that go to half-century strategic issues."

The politics of U.S.-China economic relations are intensely dynamic and sensitive, in both countries. The SED is complex international economic diplomacy. We are tackling some of the biggest structural challenges in China's economic future and in U.S.-China relations.

The economic and geopolitical landscape of the 21st century will be greatly influenced by the way in which the United States and China work together. That emerging future requires a distinct vision and effective mechanisms to achieve it. By establishing new habits of cooperation, the SED has allowed both the United States and China to begin to write the next chapter of our strategic economic relationship.