(Archived Content)
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Washington, DC--It's a pleasure to be here this morning to talk about the U.S. – China economic relationship. Prior to the first Strategic Economic Dialogue meeting in Beijing last December, Heritage published a Web Memo offering insights and advice about the SED. One of the points made was that American officials should not approach the dialogue as an opportunity to lecture Chinese officials. In a similar vein, I won't approach our time this morning as an opportunity to lecture you, given the depth of Heritage's expertise on China. I look forward to sharing my views, and to hearing about yours during the discussion following my remarks.
It's a pleasure to be here this morning to talk about the U.S. – China economic relationship. Prior to the first Strategic Economic Dialogue meeting in Beijing last December, Heritage published a Web Memo offering insights and advice about the SED. One of the points made was that American officials should not approach the dialogue as an opportunity to lecture Chinese officials. In a similar vein, I won't approach our time this morning as an opportunity to lecture you, given the depth of Heritage's expertise on China. I look forward to sharing my views, and to hearing about yours during the discussion following my remarks.You are certainly familiar with the genesis of the SED. In August, 2006, President Bush and President Hu agreed to create an on-going forum to manage our economic relationship, for our mutual benefit, on a long-term strategic basis. We held our inaugural meeting in Beijing, continued our efforts through a series of meetings among Chinese and U.S. officials, and held the second meeting two weeks ago here in Washington. This dialogue is important because we must get this relationship right. An open, honest economic relationship between our two countries is important to the future of the global economy.
For over 30 years, the Heritage Foundation has been formulating and promoting free market public policies. There is much common ground in your commitment to the principles of free enterprise and the over-riding objectives of broad-based economic engagement with China. Across the spectrum of economic issues, I believe it is in the best interest of the United States, China and the rest of the world that China move more quickly to adopt market-based reforms. And that is one of the primary objectives of the SED – to speed the pace of reform in China.
We who believe in open economies are swimming against a strong protectionist tide these days. As I explained to the Chinese, a large section of the American public doesn't believe that the benefits of trade are being shared equally between or within our two countries, and Congress reflects that view. The Chinese delegation had the opportunity to meet with Congressional leaders during their visit. I think the meetings were mutually respectful, and it was beneficial for the Chinese to personally meet those who have such serious concerns.
Protectionism isn't a growing force only in the United States. It is playing a role in domestic politics in China as well. This fall, the Communist Party of China will hold its 17th Party Congress, to determine changes in leadership. This may impact many aspects of national policy, including the pace of economic reform in China.
The task of the SED is long-term, and that is difficult in a town where short-termism is the order of the day. A newspaper headline at the conclusion of the recent SED meeting said that it did not resolve major issues. This, in my opinion, misses the point. The dialogue is an on-going process. To get results, we must build relationships, and take smaller, deliberate steps forward together to create momentum for greater change. Through candid discussions, we will ease, rather than increase, tensions and get to solutions and action.
The second SED meeting produced tangible results that have laid the groundwork for greater progress. In particular, we made notable progress on civil aviation, energy and the environment, and financial services. We announced a new air services agreement that will make it easier, cheaper, and more convenient to fly people and to ship goods between the U.S. and China. Over the next several years, we estimate that this agreement will stimulate some $5 billion in new business for our airlines as they take advantage of growing travel between our two countries. In addition to doubling the number of passenger flights over the next five years, by 2011 we will have full air cargo services available. Our future goal is to get a fully liberalized agreement in place, just as the United States recently accomplished with the European Union.
We also made progress in fostering further development of China's financial markets, an area which is crucial to China's transition to a market-based economy. The Chinese will remove a block of entry on new foreign securities firms and resume licensing securities companies this year. They will also allow foreign securities firms to expand into brokerage, proprietary training and fund management businesses. They will increase the quotas for Qualified Foreign Institutional Investors (QFII's) from $10 billion to $30 billion, and remove restrictions on the types of investments that Qualified Domestic Institutional Investors (QDII's) can make outside of China. Together, these agreements will expand opportunities for U.S. financial services firms and, by allowing greater financial flows, help create the basis for moving more quickly to a market-determined exchange rate.
China will also allow foreign-invested banks, including U.S. banks, to offer their own brand of Renminbi-denominated credit and debit cards, and will complete decisions on pending applications for U.S. non-life-insurers to convert into subsidiaries by the first of August.
Our discussions also focused on increasing government transparency and intellectual property rights. We signed an agreement to strengthen the enforcement of intellectual property laws, and to maintain an exchange between our respective Customs staff to share experiences on counterfeit goods and seizures.
Through the SED, we also collaborated on a series of policies to help promote energy security and protect the environment, which will affect not only our two countries but nations around the world. In particular, we reached agreements that will create demand and incentives for the rapid development and deployment of clean and efficient energy technology. We also agreed to work together as part of the WTO Doha negotiations to discuss reducing or eliminating tariffs in order to increase access to important environmental technologies.
I again pressed the Chinese to increase the flexibility of their exchange rate in the short term and to transition to a market-determined exchange rate in the medium term. The Chinese have taken some steps, and they can do more. While currency reform is not going to eliminate our trade deficit, a market-determined exchange rate that reflects the underlying fundamentals of the Chinese economy is one component of the actions needed to address imbalances.
Rebalancing China's growth to be less dependent on exports is key to reducing China's trade surplus, and assuring that China can continue to grow in the future without generating large imbalances. Moving more quickly to embrace competition and market principles will also spread the benefits of China's robust growth to all of China's people. Just as important is addressing the structural reasons why Chinese households save so much and consume so little. Precautionary savings rates would likely decrease, and consumption increase, if there were a stronger social safety net. Competitive retail financial services would allow the Chinese public to insure against risk, finance major expenditures like education, and garner a higher return on their savings. Investments driven by market signals and expected profitability, rather than by administrative guidance, combined with a reduction in precautionary savings, would shift the economy from its infrastructure and export manufacturing focus and spread prosperity more widely. This can only be beneficial, and China's consumption and import level can only increase.
The question, of course, is how do we get there? We will have our third SED meeting in December. Between now and then, we will continue to actively work on the trade agenda, on opening markets, increasing transparency and innovation, rebalancing growth and promoting energy efficiency and security, as well as environmental protection measures. We will continue our focus on financial services, moving at a faster pace towards a market-driven currency and expanding U.S. access in the services sector. We have room to be more creative and accomplish a good deal more.
As I said at the opening of the recent SED meeting, Americans are impatient to see real change. Today, China is part-way between an administered economy and a market-based one. I think that the greater risk for China is in moving too slowly, not in moving too quickly, and I have tried to impress that upon the Chinese at every opportunity. I view my job as working with Vice Premier Wu Yi to continue a constructive relationship that speeds our pace forward on the long- term strategic road, while building confidence and encouraging both sides to overcome hurdles and focus on achievements.
Again, thank you for the opportunity to be with you today. I look forward to your questions.