Talking things out

To clean up relations with China, the U.S. started out with a bang — a top-level meeting between U.S. and Chinese officials under the auspices of a Chinese state-sponsored research institute in Beijing chaired by Vice-Premier Wu Yi. Representing the U.S. was Treasury Secretary Hank Paulson, accompanied by Fed Chairman Ben Bernanke and several high-level administration officials, including Secretary of Commerce Carlos Gutierrez, Labor Secretary Elaine Chao, Energy Secretary Samuel Bodman, and Health and Human Services Secretary Michael Leavitt, plus U.S. Trade Representative Susan Schwab and Environmental Protection Administration chief Stephen Johnson.

Even in the 70s and 80s, when the U.S. was pressuring Japan on trade issues, the U.S. did not delegate so many cabinet-level officials to a single meeting. In other words, the summit was a very big deal, even though it lasted only two days (Dec. 14 and 15).

Ahead of the meeting, Paulson tried to manage expectations downward, saying the gathering was only the start of a “strategic economic dialogue” that would go forward with another big meeting in May 2007 in Washington.

The reserve diversification issue is not publicly on the table, but it’s the 800-pound gorilla in the room. Officially, the U.S. has three concerns — correcting the trade imbalance that is partly because of the mispriced yuan, opening up the financial market to competition and thus free-market pricing that will avert a financial collapse at some point down the road, and ending various unfair practices, such as copyright infringement and piracy.

In fact, just before the delegation’s trip to China, the office of the U.S. Trade Representative prepared a 100 age report on China’s violation of generally accepted practices under World Trade Organization (WTO) principles. The report names three areas of concern: copyright piracy, subsidies of export companies, and failure to open the economy to foreign competition, as China agreed to do when it joined the WTO.

After the meeting, Paulson said everyone agreed in principle on the major issues — the only thing missing was agreement on the timing. This is not strictly true. The Chinese asked the U.S. to promise it would take action to boost U.S. savings. Paulson declined to make the promise, although he said the U.S. government will start working on it. Nonetheless, the timing issue is plenty big enough to bring the tentative agreement crashing down and get the Chinese talking about reserve diversification.

This would be counterproductive from the Chinese point of view, but not everything in diplomacy has to be in one’s best financial interests. It’s not inconceivable that China could diversify just to show that it doesn’t like being bullied, especially within the WTO. China viewed being accepted as a member of the WTO as tantamount to being accepted in the Big Boys’ Club. Right after China joined the WTO, the Group of Seven (G7) started inviting China to its meetings as a guest. To be the subject of an adverse action at the WTO, let alone a ruling, would be to lose face.

The summit failed to achieve specific goals. The U.S. wants a faster currency revaluation from China than 6 percent over 18 months, although it’s not known what number, if any, the U.S. proposed. The Chinese commit only to the statement they will “accelerate reform.” This is too vague to mean anything, and it prolongs the waiting game.

Meanwhile, Trade Representative Schwab talked tough ahead of the summit and afterwards, too, saying the U.S. has prepared several actions to present to the WTO. It’s not clear whether the summit changed the timing of these actions. If the U.S. removed WTO actions as a quid pro quo for faster revaluation, it would mean the U.S. was choosing to disregard “the law,” which makes it look unprincipled and venal. After all, the rule of law is supposed to be the bedrock of Anglo-American civil society.

Technically, the law in this case is the WTO agreement, which is a treaty. The treaty gives the organization the choice to seek a judgment against unfair trade practices by other signatories, but it does not oblige the WTO to do so. The obligation part comes from the nature of democracy, which trusts that a government will serve the best interests of its citizens.

Regardless, the U.S. is likely to trade some of the WTO issues for progress on financial market reform and China spending more money in the U.S. One day after the summit, China announced that Westinghouse would undertake a vast nuclear energy project in China. Although it’s owned by Toshiba, Westinghouse is headquartered in Pittsburgh, and the U.S. part of the deal will be worth $3 to $4 billion.

Energy Secretary Bodman said the deal would create 5,500 jobs in the U.S. Separately, but not coincidentally, the six-party talks on North Korea’s nuclear plans resumed in Beijing after being stalled for more than a year. North Korea is China’s “client state” (albeit a troublesome one), and the U.S. is counting on China to rein in Pyongyang after it threatened Japan (the U.S. “client state”) in recent months.