DORN: Continue the dialogue

Commentary:

Powerful House Democrats Charles Rangel and Sander Levin express skepticism with the latest round of the U.S.-China Strategic Economic Dialogue, which took place in Annapolis, starting June 17. Congressional critics of U.S.-China economic policy complain there has been little progress on substantive issues such as “currency manipulation” since the SED began in 2006. Some would even go so far as to end the Dialogue altogether.

That would be a mistake. As the head of China’s delegation Vice Premier Wang Qishan noted in his opening remarks in Annapolis, the Strategic Economic Dialogue is worthwhile as a means of preventing politicization of trade and investment decisions. By taking a long view of U.S.-Sino economic relations, the SED helps circumvent the China-bashing frequently seen in congressional hearings.

The latest round of talks did open the door for a bilateral investment treaty (BIT) that could help end discriminatory treatment of foreign direct investment (FDI) in both countries.

There’s little chance, however, the Bush administration could successfully conclude a BIT with China before year-end, and with animus toward China increasing on Capitol Hill, the U.S. Senate is unlikely to ratify it this year and even less likely to do so next year. That’s a shame, because a well-crafted treaty would help China move more quickly toward financial liberalization.

A BIT would allow U.S. firms investing in China to settle disputes via international arbitration rather than subject themselves to the arbitrary rule of law that exists in domestic Chinese courts. In turn, China would have an incentive to improve its legal system and to better protect private property rights.

Meanwhile, the United States could expect greater inflows of Chinese investment funds if the rules of the game were clear and if only FDI that posed a genuine threat to national security was thwarted. When Congress blocked CNOOC’s attempted purchase of Unocal in 2005 - enabling Chevron to get the prize - Chinese investors saw a big question mark over all future investments in American firms.

China’s newly established sovereign wealth fund, the China Investment Corp., will have billions of dollars to invest in overseas acquisitions over the next several years. It’s unclear how much of that capital will flow to the United States, where it would help increase productivity and living standards.

Treasury Secretary Henry Paulson and others do not want to lose the opportunity to attract massive amounts of new FDI from China, and they’d like to provide greater access to Chinese markets for U.S. firms. So the Bush administration has good reason to want to negotiate a BIT with Beijing.

The United States should avoid making Chinese reformers lose face by demanding unrealistic concessions. China will move at its own pace, and for 30 years has been making impressive progress toward a market economy. Today, most prices are set by supply and demand, not by the government. And Beijing just announced the end of gasoline and diesel subsidies (while the U.S. Congress threatens to impose a windfall profits tax on oil companies).

As UBS economist Jonathan Anderson wrote recently, “Although state ownership is widespread, the Chinese authorities are surprisingly (and increasingly) laissez-faire when it comes to actually managing the economy. In almost every category, market forces are winning out.”

The U.S. Congress cannot change China’s institutions overnight. Demanding that China transform according to U.S. preferences is certain to antagonize the Chinese people, who have long been humiliated by the West and have not forgotten their history.

The United States should unilaterally offer China some carrots consistent with the avowed goal of “peaceful development.” As a start, the United States should commit to continuing the SED, which can cement friendships and help resolve long-run economic policy issues without the hyperbole often heard on Capitol Hill.

The United States should also end China’s designation as a “nonmarket economy” for purposes of deciding antidumping cases. That change in status would recognize China’s significant progress in opening up to the outside world since 1978.

Finally, the United States should welcome China, as the world’s third-largest trading nation and soon to be third-largest economy, into the Group of Eight (G-8) leading industrial nations. As Susan Shirk, former deputy assistant secretary of state responsible for U.S. relations with China, argues in her new book, “China: Fragile Superpower,” “Bringing China into the global establishment would strengthen domestic support in China for acting responsibly instead of emotionally.”

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