China and U.S. clash at trade talks

Posted in China , United States | 15-Dec-06 | Author: Steven Weisman| Source: International Herald Tribune

U.S soldiers stand facing the north side of the truce village of Panmunjom in the demilitarised zone separating the two Koreas.
BEIJING: A high-level array of the most senior cabinet officials from China and the United States, opening an unusual two-day dialogue behind closed doors on economic issues, promoted clashing visions Thursday of how quickly Beijing should move to modernize its economic policies to resolve tensions with Washington.

In marathon meetings at the Great Hall of the People, Treasury Secretary Henry Paulson Jr. led a team that included six cabinet colleagues and Ben Bernanke, the Federal Reserve chairman, in the most elaborate effort attempted by a U.S. government to persuade China to change its policies.

Though American officials argued that a faster pace of change was in Beijing's interest, Chinese officials countered firmly that their country must proceed at its own pace given its history of poverty, colonial subjugation and civil wars, and that American officials must try harder to understand China's constraints and achievements.

"We have had the genuine feeling that some American friends are not only having limited knowledge of, but harboring much misunderstanding about, the reality in China," said Wu Yi, the deputy prime minister, who gave a lengthy talk that was both defensive and defiant about Chinese policies.

"Our particular hope is to let people in the world know that China's development is an opportunity instead of a threat to the world, that it is a propelling force behind the growth of the world economy," Wu said in her presentation, according to a text released by her government.

Wu's comments, accompanied by a PowerPoint presentation and pictures illustrating 5,000 years of Chinese history of wars, poverty and foreign exploitation, were clearly directed not simply at her audience sitting in rows across from the Chinese delegation in a vast room of China's official meeting hall. They appeared more directed at the U.S. Congress, where criticism of China has been getting louder and protectionist measures are being readied if Paulson does not win concessions. Wu's comments showed that the dialogue in their view would be successful if it helped persuade Americans that China needed to change at its own pace.

Paulson opened the session in the morning with an appeal to China to speed its changes for what he said was its own good. His appeal was echoed by Bernanke, who U.S. officials said delivered a talk in the afternoon on monetary policy and the need for Beijing to let the value of its currency, the yuan, rise, raising the cost of Chinese exports.

But several American officials said the toughest talk was from Susan Schwab, the U.S. trade representative, who went point by point through the litany of criticisms of China outlined in a report her office issued Monday, saying that Beijing was "backsliding" in its obligations to open its economy.

Schwab said during an interview that she had taken pains to describe China's positive steps but that she had also told trade officials, and officials from other ministries, that Beijing needed to do more to respect intellectual property rights and open its economy to foreign investments and services.

Whether China will heed these appeals, the Americans said they could not tell.

"There are different perspectives that were evident today," Schwab said. "I think there is a sense on the part of the Chinese leadership that their story has not been told effectively."

The theme of Schwab's presentation, she said, was that the "Asian model" of basing economics on state control and huge amounts of exports was no longer suitable for China, which now must focus on domestic consumption rather than exports to achieve growth.

U.S. officials said Schwab's prescriptions were disputed by Ma Kai, chairman of the National Development and Reform Commission of China, and by Wu, who argued that Beijing's model of mixing state control and free markets was more appropriate given China's volatile history.

In his keynote address, Paulson called for China to change its economic policies to rid itself of huge trade surpluses with the United States, which are drawing the wrath of Congress and inviting protectionist measures.

He called for the strategic economic dialogue he started with China in September "to produce tangible results on the most important issues facing our two nations," but did not discuss currency appreciation, leaving that to Bernanke.

According to Elaine Chao, the U.S. secretary of labor, Bernanke said that allowing the yuan to appreciate in value would be "good for China."

American officials argue that shifting the currency rate would allow China to raise interest rates and let its central bank impose monetary policies to avoid inflation and overheating of the economy. At present, China fears raising interest rates because that might cause investors to purchase yuan, causing it to rise in value against the dollar and dampen exports.

As if anticipating the American appeal, the yuan did rise in value against the dollar on Thursday, with the dollar falling to 7.819 yuan, bringing the appreciation to well over 5 percent since the middle of last year. Many economists say that if the yuan were to float freely in the markets, it would rise 20 percent or more.

Generally, economists agree that a higher Chinese currency level will dampen exports by making them more expensive for American consumers. But there is disagreement about how quickly such an impact would be felt and about how much of an impact there would be.

Paulson was not specific on what might be the "tangible results" of this first session of a dialogue that is supposed to continue over the next two years, or on whether any such results would be announced Friday, the end of the current talks. Other officials said that the two sides were working on a communiqué with some steps to be announced Friday.

American officials indicated that the communiqué would likely call for working groups to tackle specific problems over the next six months, until the dialogue participants meet again in the United States.

According to U.S. officials, various Chinese officials presented statistics to show that Beijing was moving much faster than Washington appreciates to transform its economy from being driven by the sale of exports to one that would rely on consumer spending.

"Everyone acknowledges that there is an issue with low consumption," Chao, the labor secretary, said. "There was a discussion about why that is so. We talked a great deal about how to increase consumption."

Economists say that the Chinese do not consume goods because they save a larger portion of their income than do Americans, since they do not have government pension systems, health care or other "safety nets" to rely on.

Chao said much of the discussion focused on how China could set up a system of health insurance and retirement.