William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.

The third Strategic Economic Dialogue (SED) between the United States and the People’s Republic of China (PRC) took place in Beijing December 11-12.  The SED is a series of cabinet-level summits established by President George W. Bush and Chinese President Hu Jintao in August, 2006.  They meet every six months, alternating capitals.  The first SED was in Beijing in December 2006, and the second in Washington last May.   Though top officials from many departments and agencies take part, the Treasury is the lead on the American side – in part because Treasury Secretary Hank Paulson insisted on being “China Czar” before agreeing to take his job.

As expected by most rational observers, nothing came of this grand gathering in terms of helping American industry compete against Chinese producers.  Indeed, the SED was established by the transnational business wing of the Bush administration to smooth over disputes rather than resolve them in America’s favor.  This tactic has long been a favorite of successive administrations, both Republican and Democrat, is dealing with East Asian mercantilist states.  They get to continue their unfair trade practices while American industry burns.

Treasury Secretary Henry Paulson again used his opening statement to assure Beijing that nothing would be done by the Bush administration to slow China’s rise, and that his only concern was that his pals on Wall Street get a piece of the action.  It should be noted that when he said, “The United States welcomes the rise of a stable and prosperous China,” he left out the usual third adjective “peaceful” found in most U.S.  documents, which is meant to convey America’s concern that Beijing will translate its economic gains into military power aimed at U.S.  and allied security interests.  China, of course, it is already doing this.  But it is a factor in which Paulson, the former CEO of the Goldman Sachs transnational financial enterprise, has no interest.  Paulson fits the class that Teddy Roosevelt once denounced as “men of means who have made the money till their fatherland.”

Take this line from Paulson’s opening statement: “There is hardly an issue - from trade, to product safety, to climate change - where American and Chinese economic interests do not overlap.”   Compare it with Special Envoy Alan Homer’s earlier formulation from speeches made in both China and Washington in the run up to the SED: “There is hardly an issue – from trade, to national security, to climate change – or a place – from North Korea to Iran to Sudan – where American and Chinese interests do not increasingly overlap.”  Paulson dropped any references to national security or geopolitics.  The “strategic” part of the SED is missing, and no one understands this omission better than Paulson.

Instead, Paulson continues to attack the very concept of national interest in economic policy.  As he said Dec 11, “Whereas trade was once largely a source of stability in U.S.-China relations, it has recently become a source of tension, and not only because of safety concerns.  Worries about the effects of foreign competition - through trade or through foreign investment - have led to a rise in economic nationalism and protectionist sentiments in both our nations....  Many people in the US are not sure...that the benefits of trade are being shared fairly.” This is an understatement, given that the U.S.  trade deficit with China will approach $300 billion this year.

Paulson sees his mission as preventing those Americans with concerns about China from having any impact on policy.  He thus assured his Chinese hosts, “The Bush Administration has consistently opposed protectionist legislation directed at China.” The day after SED III concluded, House Ways and Mean Committee Trade Subcommittee Chairman Rep. Sander Levin
(D-MI) said he expects the committee to move on legislation next year that could address Chinese intellectual property violations such as counterfeiting and piracy, Beijing's currency manipulation, and offer improvements to the China-specific safeguard provisions of U.S.  trade law.

While the fact sheet put out by Treasury mentions cooperation on “steps [that] will allow China to further combat pharmaceutical counterfeits,” the lack of any mention elsewhere of intellectual property protection would indicate that only the usual lip-service is being paid by Beijing to curbing a rampant practice often involving companies owned by China’s communist elite or by the People’s Liberation Army.  

Currency manipulation, which was the main issue behind the creation of the SED, is not mentioned at all.  It is clear by now that Beijing has no intention of voluntarily changing its fiat exchange rate policy that undervalues the RMB for major commercial advantages in U.S. and world markets.  Indeed, as the euro appreciates against the dollar and the RMB, China has been able to rapidly expand its trade surplus in Europe as well as in America.  

The SED was originally established to forestall Congressional action on trade policy, but its designed failure to do anything to change trade flows now compels Congress to act if American manufacturing is to survive the boundless onslaught of state-supported Chinese industry.  In an interview with the New York Times, Paulson is quoted as saying, “The biggest issue we have with China right now is economic nationalism.  In China, what you find is that you've got an increasingly powerful domestic industry that is a strong lobby.” The only way to combat this problem is to invoke some good old-fashioned American nationalism on behalf of American domestic industry.  That is, after all, how America’s world-beating economy was built in the first place.  

The only business group Paulson seems concerned about is his own, the banking and financial services industry.  He has been pushing hard to get Beijing to open its financial sector to more investment, with larger equity shares to be held by foreign interests in Chinese state-run banks.  Beijing has refused.  All that came out of SED III was that by the end of next year, China agreed to complete a study with recommendations on policies governing foreign equity participation in the banking sector.  China also agreed to complete a study with recommendations on adjusting the extent of foreign equity participation in the securities sector.  Beijing might well offer somewhat larger minority shares to foreign investors to get their money and, perhaps, some managerial advice.  But Beijing will never allow majority equity ownership that would give foreign interests control over any important segment of its financial system.

In the meantime, Paulson hailed the opening of a branch of the China Merchants Bank in the United States, and assured China that its banks, brokers and investment advisors will be given “national treatment” – meaning that they will have all the rights of  an American-owned enterprise to operate in the U.S.  market.  No reciprocity is required.  China Merchant Bank has 64 percent of its shares held by state-owned entities, and a  majority of its directors come from “large, state-owned enterprises” according to the bank’s 2006 annual report.  

Paulson also seems to have given ground on Beijing’s constant demand that the United States eliminate its national security restrictions on Chinese access to military and “dual use”high technology.  The final SED Joint Fact Sheet states that the countries will, “Continue cooperation through the JCCT High Technology and Strategic Trade Working Group by positively implementing ‘Guidelines for U.S.-China High Technology and Strategic Trade Development’ and taking appropriate constructive measures and working out an action plan to expand and facilitate bilateral high-tech and strategic trade.” The Commerce Department likes to claim this is only for civilian use, but given that state-owned firms dominate China’s high-tech industry, the practical division between civilian and military use does not exist. Again, Paulson has no interest in national security.  As a businessman, it’s just something that he thinks gets in the way of profitable commerce.  As communists, Beijing’s leaders are well aware of Lenin’s comment about capitalists being willing to sell the very rope that will be used to hang them.

The next SED is scheduled for June 2008.  It would be best if it were cancelled, so work could be focused instead on meeting the challenge China poses to the United States as both an economic and geopolitical rival.  

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