November 5, 2008
HP-1253

Special Envoy for China and the Strategic Economic Dialogue Alan Holmer
Remarks on the Future of U.S.-China Economic Relations
at The Johns Hopkins University-Nanjing University Center for Chinese and American Studies

NANJING, CHINA - I am honored to be here in Nanjing today and at The Johns Hopkins University-Nanjing University Center for Chinese and American Studies, to speak about the future of the economic relationship between the United States and China.

As the capital of China during several historic periods, Nanjing not only holds a prominent place in Chinese history and culture, it has also contributed significantly to relations between the United States and China. Just before leaving the United States I spoke with former Ambassador to China Stapleton Roy, who also serves as Chairman of the Hopkins-Nanjing Advisory Council. As some of you know, Ambassador Roy was born in Nanjing and raised in China. Reflecting on your city's historical place in U.S.-China relations, Ambassador Roy recalled that the U.S. diplomatic mission in China was located in Nanjing from 1928 until 1937, and from 1945 to 1949. The first American ambassador to China was stationed in Nanjing in 1935, when the U.S. legation there was upgraded to an embassy. After the end of World War II, it was in Nanjing that General George Marshall met with Zhou Enlai in 1946 as part of the unsuccessful U.S. effort to negotiate peace between the KMT and the Chinese Communists. The U.S. embassy remained in Nanjing until 1949.

Just after normalization of U.S.-China relations, now thirty years ago, visionary leaders from both our countries envisioned a graduate school dedicated to improving relations between China and the West through the development and training of future leaders – young people who are not only fluent in each others' languages, but are also equipped to understand each others' perspectives and through their careers committed to building stable and productive relations. Now, more than ever, we need institutions like the Hopkins-Nanjing Center. The talent and wisdom of new generations of American and Chinese leaders educated here will contribute to prosperous and stable U.S.-China relations.

Today, as I speak about the future of U.S.-China economic relations, I would like to challenge and encourage you as future leaders to seize the vision the Hopkins-Nanjing Center represents.

One of the most important decisions facing the new American President will be how to respond to China's emergence as a global power. Possibly the most consequential economic question of the 21st century for the United States and for China is whether we get our economic relationship "right."

Our economies are intricately inter-linked. Last year the United States and China combined for more than thirty percent of worldwide gross domestic product. Chinese exports to the United States in 2007 accounted for 9.5 percent of Chinese GDP; China is the largest supplier of United States imports. China is now the United States' third largest export market; in the past decade, our exports to China have increased six times as fast as our exports to the rest of the world. Investment flows between our two countries are also expanding rapidly.

And our inter-relationship goes well beyond trade and investment. U.S. and Chinese interests increasingly overlap on virtually every international issue – from global financial developments, to national security, to climate change.

While some in America see China as a threat that must be countered or contained, I believe that the only path to success with China is through engagement. We must recognize that China's growth is an opportunity for U.S. companies and consumers, for our producers, exporters and investors. A stable, prosperous and peaceful China is in the best interest of the Chinese people, the American people and the rest of the world.

What should be our vision for our future relationship? What does it mean to get the relationship "right"? I see a future in which our ability to work together matches the degree to which our economies are already so deeply integrated. I see a future in which individuals and leaders in each nation communicate well, grow in trust, work through misunderstanding and crises, and expand -- where possible -- common interests, while recognizing distinct national goals and interests. In this vision, I also see people in each nation recognizing our commonalities -- that we mutually benefit from trade, investment, and deepening exchange.

This is the vision the leaders of our two countries promote through the Strategic Economic Dialogue. It is a vision we must continue to pursue in the months and years to come.

Our interdependence has become all the more apparent during the recent period of worldwide financial turmoil.

Addressing these developments requires the dramatic steps we are taking in the United States, and it requires close international collaboration and cooperation. U.S. officials have been in close contact with Chinese leaders, as well as with leaders of many other nations. This has included frequent calls between President Bush and President Hu, Treasury Secretary Paulson and Vice Premier Wang, and Treasury Undersecretary McCormick with his counterparts in the Chinese government. These conversations have been useful and constructive. And we welcome recent public statements by President Hu and Premier Wen about the constructive and cooperative role China has been playing in global efforts to deal with the current financial market turmoil.

In just over a week, President Bush will host a meeting in Washington with President Hu and 18 other world leaders. We expect the leaders will discuss the underlying causes of the financial crisis, review progress being made to address the crisis, begin developing principles of reform needed to ensure it does not happen again, and charge working groups to develop recommendations to be considered by leaders in a subsequent summit. In our view, leaders should also discuss the adverse effects of the current crisis on emerging economies and developing nations.

The summit also provides an opportunity to discuss how to enhance our commitment to open, competitive economies as well as trade and investment liberalization. Strengthening these underpinnings of capitalism is, and will continue to be, the best way to improve standards of living and assure future prosperity for developed and developing nations alike.

Because of the importance of our bilateral relationship, President Bush and President Hu launched the Strategic Economic Dialogue (SED) in September of 2006. The Special Representatives of the two Presidents are Vice Premier Wang for China and Secretary Paulson for the United States. When the SED was first launched, few people thought much progress would be possible because of political changes in both countries.

But our joint approach has proven effective and has achieved important, tangible results, despite the challenges. Over the past two years we have built a strong foundation for this dialogue by focusing on policy areas in which China's reform agenda and U.S. interests intersect. U.S.-China relations are more productive today than ever before.

The SED has found new and constructive ways to address some of the most significant matters in our economic relationship --- including growth imbalances, financial stability, energy security and environmental sustainability, maintaining open trade and investment policies, and product safety. Managing these challenges is vital to the United States, China, and to the future of the global economy.

Perhaps most importantly, we have established new habits of cooperation and a culture of collaboration with our colleagues in China, across all economic ministries, and at both political and career levels. Despite our long history of interaction, people in our two countries occasionally have shown a stunning ability to misunderstand each other. In the SED we have acted to lessen misperceptions and miscommunication between our countries. The mere creation and sustained attention of the SED demonstrates to the people of both countries that the United States values a stable, prosperous, and peaceful China. We believe this kind of China is in the U.S. national interest.

There is no better example of the power and utility of a Strategic Economic Dialogue based on mutual trust than our recent close and frequent communication and cooperation with Chinese leaders as we address the challenges in the financial markets.

We have also worked to sustain support for open economies in both of our countries. Trade and investment, once the glue of U.S. -Chinese relations, now also represent a source of increased tension. Any dynamic economy that is constantly creating new, higher-value jobs faces factory closings and job losses that are real and painful. The benefits of free trade are often spread across an entire country, while the lost jobs are more concentrated and immediately visible. But succumbing to the temptation to make trade and foreign investment a scapegoat only breeds support for isolationist policies that will make both countries worse off, sacrificing future job opportunities and higher standards of living. Through the SED we have addressed short-term and long-term issues, kept our economic relationship on an even keel, and avoided legislation in the U.S. Congress that would have been harmful and counterproductive.

We have also addressed product safety, an issue that has placed the "China brand" at risk. Last December our two countries used the SED to achieve two Memoranda of Agreement: one on food and feed, another on medicines and medical devices. We now need to intensify our work together to enhance China's regulatory and legal infrastructure, to help China build quality into each stage of the manufacturing and distribution process. A useful step will be the formal establishment later this month of offices in China for the U.S. Food and Drug Administration in Beijing, Shanghai, and Guangzhou.

While the SED has provided an important mechanism to address time-sensitive, current issues, our nations' leaders have also grappled with the most significant, challenging, and strategic issues in our bilateral economic relationship, issues that will be with us not just this year, but for years to come. Such issues include, for example, managing financial and macroeconomic cycles; sustaining strong and stable economic growth; strengthening energy security and environmental cooperation; reforming international economic and financial institutions, maintaining open markets for trade and investment; encouraging innovation, and advancing the rule of law and transparency. In future years we need to maintain and grow the quality and depth of our current dialogue on these subjects.

I have been deeply involved in international economic issues for over 25 years, beginning in the administration of President Reagan – nearly as long as China's "reform and opening" period. One of the clearest lessons I have learned is that those countries that open themselves to competition, reform their economies, and welcome foreign investment benefit their citizens greatly. Direct investment in another country, such as manufacturing plants or service companies, is the ultimate vote of confidence in that country's economy.

Such openness is the most reliable path to economic growth and reduction of poverty: it provides better jobs and opportunities, improved living standards, greater consumer choice and lower prices and lower inflation. Openness is not a zero-sum game; it enhances efficiency, productivity, and competitiveness for all sides.

There is no better example of this principle than the experience of China. China's reform and opening over the past three decades have produced one of the most dramatic economic transformations in world history.

American investors in China, and Chinese investors in America, sometimes question whether the other country is truly open to investment and provides adequate legal protections. To answer this question, we sent a powerful and clear signal at the June SED meeting by launching negotiations of a U.S. - China bilateral investment treaty. Through these negotiations, we seek to assure our people and the world that our two nations welcome investment and will treat each other's investors in a fair and transparent manner. And we will work even harder to resolve a critical issue for American companies working in China --- better enforcement of intellectual property laws, which will protect those companies and encourage further foreign investment in China, while also helping China on its path to become an innovation society and accelerating the development and competitiveness of its economy.

In future years, the economic health of both of our countries will depend in significant part on whether we keep our markets open to trade and investment.

Economic growth must also be sustainable, both economically and environmentally. In this regard, one of the SED's major achievements is the Ten Year Energy and Environment Cooperation Framework. This framework is a bilateral mechanism to elevate and intensify our cooperation to create a new energy-efficient model for sustainable economic development and to address the factors that cause climate change. Greater breakthroughs can be expected in the years ahead, and this framework provides the next U.S. administration a critically important platform for engagement with China.

Another key part of sustainable economic growth is the effort of China's top leaders to transition to an economy that is more services and consumption-oriented, and less reliant on low-value added manufacturing, and that depends more on the skills and resourcefulness of the Chinese people and less on material inputs and natural resource depletion and demand in foreign markets. In addition, strong consumption-led growth provides China the surest guarantee of sustained economic growth in the face of weaker growth in China's trading partners.

We continue to believe that more market-based pricing, including for interest rates and exchange rates, will help China achieve its goal of more harmonious and balanced growth. And the SED has provided a useful forum for discussing China's exchange rate policy; we are pleased that since July of 2005 China has appreciated the RMB by over 20 percent against the dollar over the past several months, and has appreciated the RMB substantially on a trade-weighted basis, i.e., against an average of the currencies of China's major trading partners. While we understand that circumstances have changed for China in recent months, we continue to believe that it is in China's interest to move further in the direction of a more market-determined exchange rate. Such action would provide Chinese officials with greater tools to effectively manage the economy and, further, help facilitate a needed reallocation of capital towards production for the domestic market.

In the financial sector, China is in the midst of developing and opening up its institutions. During the recent global turmoil, we have learned that the U.S. financial system is in need of reform. To help rebuild the strength and confidence in our markets, the United States has worked to implement the findings of international experts in the Financial Stability Forum (FSF) and U.S. experts in the President's Working Group on Financial Markets (PWG). The Financial Stability Forum recommendations are applicable to the financial markets around the world, and the United States is committed to implementing them in full.

As China proceeds with financial sector development, it can and should benefit from the lessons the United States and other countries have learned from the challenges in our financial markets, and we are happy to share them. But it would be unfortunate if, as a result of this turmoil, policymakers in China mistakenly abandon their pursuit of financial sector innovation that has been so important to supporting China's growth in productivity and macroeconomic stability.

When I became Special Envoy for China and the Strategic Economic Dialogue in February of 2007, then-Vice Premier Wu Yi encouraged me to visit the parts of China beyond Beijing and Shanghai. I have happily followed her advice. In the past 18 months, I have been privileged to visit Shenyang, Qinghai, Xi'an, Chengdu, Guangzhou, Shenzhen, Hong Kong, Ningbo, and Yingxiu, a small town at the epicenter of the earthquake in Sichuan Province. My trips have included visits to rural villages to see both the opportunities and the challenges you face in promoting balanced, harmonious growth. I was particularly eager to travel across your great nation because, while there is a huge amount of information about the United States in China, and about China in the United States, there is not enough genuine understanding, and even less wisdom about how we should manage our relations together.

In that context, I was particularly eager to speak here today because I knew I would be with many future leaders of the U.S.-China relationship. I appreciate your attention. I hope that you share the vision I spoke of earlier, a relationship between our two countries based on engagement, communication, trust, working through issues, understanding, and wisdom.

During the past two years we have seen in both our countries a period of change and turmoil: political and governmental change in both China and the United States; turmoil in global financial markets; and protectionist trends in both of our countries among those who would take our relationship in unhelpful directions.

Throughout that period, the Strategic Economic Dialogue has provided a strategic, long-term, steadying forum and mechanism through which we can at the most senior levels of our two governments constructively address the most important issues we face. We have established an impressive body of work. Dialogue between the United States and China is now more productive and sophisticated than ever before. Through the SED we have succeeded in establishing a culture of collaboration; addressed time-sensitive, current issues, such as financial markets, economic nationalism, and product safety; grappled with the most important long-term issues in our relationship; promoted policies for open markets and investment; signed a Ten Year Framework on Energy and Environmental Cooperation; worked to rebalance economic growth and modernize the financial sector.

As Secretary Paulson has said, we hope that the next U.S. President will expand on the SED and take U.S.-China relations to the next level. At the same time, leaders in both of our nations' capitals understand that if the SED is to be sustained, it must be more than talk; it must continue to yield specific, tangible results, what we call signposts along the path toward transformational reform. We look forward to further progress in the on-going discussions at our next meeting of the SED in Beijing in December. Thank you.