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Up Front

What You Need to Know About the U.S.-China Strategic and Economic Dialogue

Qi Ye, Cheng Li, David Dollar, Jonathan D. Pollack, Kenneth G. Lieberthal, and Richard C. Bush

The sixth meeting of the U.S.-China Strategic and Economic Dialogue—or S&ED—takes place July 9-10 in Beijing, with Secretary of State John Kerry and Treasury Secretary Jacob Lew representing the United States and State Councilor Yang Jiechi and Vice Premier Wang Yang representing China. Since 2009, the S&ED has offered a platform for both countries to address bilateral, regional and global challenges and opportunities, and this year’s meeting comes at a critical time to stabilize the U.S.-China relationship. Brookings John L. Thornton China Center scholars Richard Bush, David DollarCheng LiJonathan Pollack and Qi Ye offer insight into this significant meeting.

Richard Bush: Taiwan and Hong Kong Will Cast Shadow Over Proceedings

Neither Taiwan nor Hong Kong will likely be on the formal agenda for the S&ED, but they will hang like rather dark clouds over the proceedings. Tensions in Hong Kong reached a new peak last week as a several hundred thousand people participated in an unofficial referendum in support of a liberal approach to electoral reform and then braved bad weather to march in support of the same goal. The Chinese and Hong Kong governments held firmly to their position that any reform be restrictive. Despite these entrenched positions, there is a sensible compromise that is objectively available. But enacting it will require flexibility on both sides.

Over the last six years, Taiwan and China had made significant progress in normalizing their economic relations. But this process hit a wall this spring as opposition parties and civic activist groups mounted protests against a draft agreement on trade in services. This has forced the governments in Taipei and Beijing to regroup and try to ensure that things don’t get worse. But Taiwan politics remains very fluid, and the possibility exists that the candidate of the opposition Democratic Progressive Party will win the next presidential election, scheduled for January 2016, with unpredictable consequences for cross-Strait relations.

How do these two issues affect U.S.-China relations? On Hong Kong, the United States supports genuine electoral reform that will permit a competitive election for the Hong Kong chief executive. On Taiwan, Washington has supported the improvement in cross-Strait relations but supports Taiwan’s freedom to make its choices free of any coercion and at its own pace. On both issues, Beijing suspects that the United States is acting behind the scenes to prevent it from achieving its political objectives. That perception misstates the U.S. role: the reason that Beijing has not achieved its objective in both Hong Kong and Taiwan is that it has not yet made proposals that meet the wishes and expectations of the publics of each place.

David Dollar: Economic Track Can Stabilize U.S.-China Relations

The storyline going into this year’s S&ED is that the bilateral relationship is deteriorating because of problems on the strategic side: the U.S. indictment of five Chinese officers for cyber-theft of trade secrets and acrimonious statements back and forth on maritime issues.

My experience with the first five S&ED meetings was that the conversation was more important than the outcomes. During those five meetings, problems on the strategic side never interfered with steady, albeit modest, progress on the economic track. This year, the Chinese will want to hear from Janet Yellen about the recovery of the U.S. economy and the Fed’s exit from extraordinary measures and from Jack Lew about the U.S.’s fiscal consolidation and the next round of debt ceiling debate in March 2015. The U.S. side in turn is interested in how the economic reforms outlined in China’s Third Plenum resolution will be translated into concrete measures and the timeline for doing so.

In a session hosted by the U.S.-China Business Council this week, Lew expressed some frustration at the actual pace of reform. Last year the two sides agreed to negotiate a bilateral investment treaty on the basis of a negative list. This would be a big step forward for China’s reform as it would require opening up closed sectors such as financial services, telecom, media, logistics and energy. There seems to be a great deal of internal opposition to these reforms in China, however, so a big breakthrough is not likely anytime soon.

The S&ED conversation should be sufficient to stabilize the relationship and prevent a downward spiral. President Obama is likely to visit China in November for the APEC Leaders’ Meeting. Sustained improvement on the economic front would require that China be ready by then to make some significant market opening moves. If China follows through on its Third Plenum reform intentions, it could provide a foundation for a more balanced and healthy economic relationship.

Cheng Li: Time to Emphasize Track Linkage and Market Opening

By design, the S&ED is intended to link security issues and economic issues in a strategic way. The previous rounds of the dialogue have shown that when the two countries have had irresolvable barriers on one track, they might have a better chance to achieve breakthroughs on the other track. Significant progress on economic cooperation could in turn prevent security tensions from deteriorating further.

Participants in this year’s S&ED should be more engaged in “track linkage” than in the past. In the wake of growing nationalistic sentiment in the region, the U.S. and China are unlikely to resolve any territorial or maritime disputes, nor will they suddenly begin to cooperate on cyber security. Yet, each side has strong incentives – and exceptional opportunities – to push for the market openness of the other.

The Third Plenum blueprint promises to be as consequential as Deng Xiaoping’s economic reforms that began in 1978. President Xi Jinping has embraced the market as the “decisive force” to help the Chinese people realize the “Chinese dream.” As such, leaders have made financial liberalization and service sector development a top priority, especially in public health, education, entertainment, tourism, logistics and green consumption– fields in which American businesses have an advantage and could benefit from market opening.

President Xi’s strong anti-corruption campaign has not only jailed a significant number of corrupt officials, but also undermined state-owned enterprises in various industries such as energy, transportation, telecommunications, finance, steel and mining, thus potentially opening these monopolized sectors to competition. Chinese leaders explicitly claim that like China’s accession to the WTO, foreign companies can help force the implementation of market reforms. At the same time, Chinese enterprises (including some large private firms) have become increasingly interested in investing in the United States—a trend that could lead to infrastructure improvements and job creation in the U.S.

The S&ED dialogue is timely, the stakes are high, the impact is multidimensional, and the opportunities should not be missed.

Jonathan Pollack: S&ED Must Stem Increasing Negativism and Potential Alienation

In June 2013, Barack Obama and Xi Jinping met in Sunnylands, California, where the American and Chinese presidents voiced support for “a new model of major power relations,” hoping to ameliorate potential animosities and to broaden U.S.-China cooperation. A year later, the prospects for larger political and strategic understandings seem far more problematic. A host of contentious issues, ranging from cyber espionage, mounting maritime tensions in the East China Sea and South China Sea, growing complaints from U.S. firms about access into the Chinese market, and fractious internal debate within both countries about each other’s strategic intentions, undermine the possibilities for positive movement.

A principal objective of this week’s S&ED must be to stem the increasing negativism and potential alienation in bilateral relations. If these differences fester or deepen, the capacity of both governments to deal intelligently with a full spectrum of vital policy issues will be undermined. A candid airing of differences should be at the very core of the S&ED process. The presence of senior officials can also provide direction and necessary guidance for policy bureaucracies in advance of President Obama’s November visit to China for the APEC Leaders’ Meeting and the anticipated renewal of face to face discussions between the two presidents.

A two-day dialogue cannot eliminate the underlying differences and suspicions in U.S.-China relations, nor will it mute the cacophony of voices in both systems over the longer-term Sino-American future. But policy makers can reinforce a shared awareness of their mutual responsibilities for what is arguably the world’s most consequential bilateral relationship.

Qi Ye: Reinvigorated Cooperation Needed on Energy and Environment

A major product of President Obama’s first visit to China in 2009 was the MOU on U.S.-China cooperation on climate change, energy and environment, which built upon the Ten Year Framework on Environmental Cooperation developed from the Strategic Economic Dialogue (before it evolved into its current form as the S&ED).

A concrete result from the signing of the MOU was the establishment of the joint center for clean energy research (CERC). President Obama’s visit to Beijing this fall for the APEC summit will mark the fifth anniversary of the MOU and CERC. The S&ED presents an opportunity to gauge sentiment on both sides regarding continued cooperation and to push for an assessment of current efforts.

Despite high expectations, the road for cooperation has been bumpy over the last five years, starting with a messy Copenhagen process just a few weeks after the MOU was signed, followed by the anti-dumping, anti-subsidy investigation on solar photovoltaic panels from China. On the operational side, many have questions about CERC. How has it been funded? Has cooperation been sufficient? What are the tangible results?

Preparations have begun for leaders to gather in New York this September for the UN conference on climate change and then in Beijing for the APEC summit, making now the opportune time for the reinvigoration of this critical cooperation. Increased cooperation will be particularly meaningful as the world prepares for a global agreement on greenhouse gas emissions next year in Paris since the U.S. and China are being scrutinized carefully for their rhetoric and actions on climate change.

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