Preview of the Second Session of the Strategic Economic Dialogue with China

MODERATOR: Good afternoon. Welcome to the Foreign Press Center. This afternoon we have Ambassador Alan Holmer, who's the Special Envoy for the Strategic Economic Dialogue at the Department of Treasury. He will start with a few brief opening remarks and then be happy to take your questions. He's on a somewhat rushed schedule that became a little more rushed due to the circumstances a few minutes ago, but I think we'll have enough time to get through your questions. Thank you. Ambassador Holmer.

AMBASSADOR HOLMER: Thank you. Okay. I wanted to do four things this afternoon. The first is to say a few words about the Strategic Economic Dialogue, to describe the format for the meetings next week, describe what we plan to talk about during the meetings and then finally respond to your questions.

First, the SED itself, as two of the leading economies in the world it's critical that we and China get our economic relationship right. This may be one of the most important economic questions of the 21st century. Because of the importance of this question, President Bush and President Hu established the SED in September of 2006. It reflects the fact that the United States relationship with China is of great strategic importance to both nations. It is focused on long-term strategic economic issues.

The dialogue allows each country to speak with one voice at the highest levels. It allows us to prioritize issues and to address issues that extend across multiple agencies and departments. The SED is not a replacement for any of the ongoing bilateral or multilateral dialogues, including the WTO. But the dialogue does provide impetus and creates momentum where it is needed. And while the SED will convene in Washington next week, it's very important to recognize that the SED is not just an event that occurs twice a year. It's a management tool, a tool to manage our bilateral economic relationship and to keep it on an even keel even during times of tension.

Second, let me describe the format for the meetings next week. Secretary Paulson will be joined during these talks by other administration officials, including Agriculture Secretary Johanns; Commerce Secretary Gutierrez; Labor Secretary Chao; HSS Secretary Michael Leavitt; Transportation Secretary Peters; Energy Secretary Bodman; U.S. State Representative Susan Schwab; HUD, Housing and Urban Development Secretary Jackson; EPA Administrator Stephen Johnson; Deputy Secretary of State John Negroponte and the Federal Reserve Chairman Ben Bernanke will also participate in the discussions.

China's Vice Premier Wu Yi will lead a distinguished delegation of 15 ministers and representatives from a total of 21 ministries and agencies. These include ministries such as the Ministry of Finance, the NDRC -- the National Development and Reform Commission -- the Ministry of Science and Technology, the Ministry of Commerce, the Ministry of Health and many others.

Now, let me give you a broad outline for the two-day meeting which will go from early in the day on Tuesday the 22nd until about noon on Wednesday, the 23rd. The day on Tuesday will start with opening statements by Secretary Paulson and Vice Premier Wu. That will be followed by a presentation by the honorable Henry Kissinger. It's important to remember that 2007 is the 35th anniversary of the Shanghai Communiqué. And we wanted to start off this session by thinking big, thinking long term, thinking strategic. Following Secretary Kissinger's remarks, there will then be three issue sessions on Wednesday. The first is a session entitled "The Economic Agenda: Services Transparency, Investment." Secretary Paulson will chair that session.

The second issue session to be held after lunch will be "Energy and the Environment." Vice Premier Wu will chair that session. The third issue session will be on Tuesday -- will be Rebalancing Growth and Secretary Paulson will chair that session. That will conclude the business portion of the meeting on Tuesday and then on Tuesday evening both delegations will dine together at the State Department.

On Wednesday, the day will begin with a group photo and then there will be a fourth issue session on innovation. That session will be chaired by Vice Premier Wu. And following that session on Wednesday morning there will be a closing session and then closing statements by Secretary Paulson and Vice Premier Wu.

It's, as I'm sure people in this room recognize, it is extraordinary that such a large and senior delegation from our two governments will participate in this dialogue. It demonstrates the importance that both nations place on our bilateral economic relationship as well as the importance of both countries in the global economy. And while we are focusing on long-term strategic issues, and as we work toward those goals, we are also looking for tangible results. Since the last meeting that was held in December in Beijing, there have been literally hundreds and hundreds of meetings and teleconferences and videoconferences between our two countries.

Next week's high-level meeting is a way to check our progress and to catalyze further work on four key work plans that were developed from the December meeting in Beijing. The first of those work plans is in the area of services, investment, and transparency. Structural reforms in both financial services and non-financial services are very important to China and important to us as well.

One specific item on the agenda is civil aviation, which would increase access to each other's markets in air cargo and air passenger travel. The second key area is energy and the environment. Through the SED, we're collaborating on a series of issues, including improving energy efficiency and sharing technologies. After the first meeting, SED 1, in Beijing in December, we announced that China will join the governing steering committee of the FutureGen project which is a public/private initiative to design a coal fueled power plant that produces zero emissions.

The third discussion area is innovation. Competition and investment creates strong incentives for firms to increase productivity and provide the framework within which creative ideas can flourish. Producing, managing and protecting intellectual property is central to this discussion.

And finally a major facet of our discussions is how China can meet its own goal of rebalancing the Chinese economy so that domestic consumption plays a larger role and investments and exports play smaller roles in driving China's economic growth. This requires greater currency flexibility in the short term and moving to a market with determined exchange rate in the medium term. But even more important is the development of a social safety net that would allow the Chinese people to reduce their very high precautionary savings and the development of financial products that would allow Chinese citizens to ensure themselves against risk and allow Chinese citizens to finance major expenditures like education and home purchases.

Rebalancing the Chinese economy toward consumption will raise the welfare of the Chinese people and allow China to grow in the future without generating huge trade surpluses. These are goals that are shared by both the United States and China.

The SED has raised and intensified our level of dialogue and since our meetings in December we have seen positive steps towards reform within China. For example, in April, China's State Council released new regulations to promote government transparency, an important request for U.S. businesses operating in China. In March, China agreed to terminate a subsidy that allowed major Chinese exporters to receive discounted loans not available to other companies. China has also taken other steps to reduce their export subsidies.

With respect to market access, one example is that the conversion of bank branches to subsidiaries under the foreign bank regulations has been a smooth and quick process. In March, four banks, including one American bank, had their applications approved. And also over the last two months, in March at the National People's Congress, private property regulations were issued and these private property regulations were a significant step toward market -- towards a market economy and the development of legal rights within China.

We expect to be able to build on these reforms, not just during this week but in the period that follows. And next week, I hope that we'll have more to report to you on the discussions that will occur on Tuesday and Wednesday and also other progress that's been made in the context of those discussions. And with that, I'd be very pleased to respond to your questions.

QUESTION: Thank you. My name is Kaori Iida. I'm with NHK Japanese Public Television. I understand that this is long-term strategic dialogue, but I was wondering what is it that you would like to accomplish with this particular meeting. And also, on a completely separate note, I was wondering among the four sessions, where would something like food safety be discussed. With the pet food issues and the broader melamine investigation going on, I would assume that would be some kind of interest to the United States.

AMBASSADOR HOLMER: In terms of specific results, it's very important to recognize that the Strategic Economic Dialogue is -- as I said before, it is not a specific event, but is a management tool. As I also indicated, we have seen progress in the areas of transparency, the banking regulations, private property, reducing export subsidies. And we will have more to report next week in the four over-arching areas that I described: Services, Investment, Transparency; rebalancing growth; innovation; and energy in the environment.

I do expect that we will have progress in each of those areas, but it's premature for me to be able to calibrate the extent of those. I guess I'd also emphasize that none of us, including in particular Secretary Paulson, ever said that this would be easy. We have attempted to address issues that are truly major, long-term, strategic. With the whole issue, for example, of opening up China's financial services market, is the kind of proposal that is very large and challenging, and therefore it's hard for me to be able to respond as to exactly what the results will be next week.

But I also can't emphasize enough the importance of the dialogue in and of itself. We don't want to have a discussion where it's just talk and talk. But the fact that we are talking, that we are sharing ideas, that we are understanding better what China's perspective is with respect to these issues -- they're understanding our perspective. And we're also trying to explain, again from our perspective, why what we are proposing for China is so much in the interest of China and their people.

You also asked about pet food safety. Those are issues that are important that are being addressed with our Food and Drug Administration and their counterpart in China. I believe the Chinese, like every other nation around the world, recognizes that consumers need to be able to trust their products, and I think everybody who is involved in this issue is working very hard on it. The SED will provide an opportunity for further discussion on these topics. Exactly when that will occur on Tuesday or Wednesday, I'm not sure, but that's one of the benefits of having this kind of broad forum, in that it does provide an opportunity for those kinds of discussions.

QUESTION: Naichen Mo from Phoenix Television of Hong Kong.

AMBASSADOR HOLMER: Thank you.

QUESTION: Ambassador Holmer, I read in the report that you spoke about China's decision to widen this currency trading band this morning. Did you expect China would take the -- this step right before the SED, and how do you plan to approach them now next week about the currency issue? Thank you.

AMBASSADOR HOLMER: You're welcome. I do think that this was a useful step towards greater flexibility and ultimately an eventual float of the RMB, and we believe it's now important that Chinese authorities use this wider band and allow greater currency movement within each day and also over time.

QUESTION: Mr. Ambassador, Madame Wu has criticized actually in an opinion piece carried on Wall Street Journal yesterday that some people in this country is advocating protectionism about the trade policy. What's your response to that?

AMBASSADOR HOLMER: I'm sorry. Could you just -- I didn't quite -- say it again from the top.

QUESTION: Vice Premier Wu has criticized in an opinion piece carried Wall Street Journal yesterday that some people in this country is advocating protectionist trade policy, especially toward China. What's your response?

AMBASSADOR HOLMER: Right. I did have a chance to read that piece in the Wall Street Journal and was pleased by the very positive tone that was expressed in it, particularly the headline; that is, the need for win/win agreements between the United States and China and why our strong economic relationship is a win/win economic relationship between our two sides.

Clearly, there are strong views with respect to trade with China and as it relates to possible legislative proposals. I mean, our Congress does reflect the concerns of the American people; but at the same time, members of Congress also recognize that we need to get the long-term economic relationship with China right. And that's what I think -- and that's what I interpreted from the article in the Wall Street Journal about how important it is that we get this economic relationship right. I do believe that's why the presidents of the two countries have established this dialogue and why it is such a very high priority for President Bush, for Secretary Paulson and for this entire administration.

QUESTION: Ambassador, my name is Li Xin from China's Caijing Magazine. Two questions. One is: Are there any tangible results the Chinese side wants America to deliver through this round of talks? The second is: What has America done since last SED in China that facilitates the discussion? What positive steps has America taken? Thank you.

AMBASSADOR HOLMER: Right. Thank you for the question. I think it's probably best for me to leave to China and representatives of the Chinese Government to speak for themselves about what it is that they hope to be able to get, to be able to accomplish with this dialogue.

I think in terms of steps that have been taken by the United States, I mean, what we have attempted to do is to listen and to understand the perspectives of China and the government officials with whom we have spoken. Secretary Paulson, for example, went to China to deliver a major speech on financial services in Shanghai, where he was really attempting to outline, one, what it is that the United States wants to achieve, but more importantly, why, from our perspective, this is so important as far as China and its economic future is concerned. So I think that would be my response on that question.

QUESTION: My name is Norman. I'm with the China Times of Taiwan. Mr. Ambassador, I have two questions. First, why Strategic Economic Dialogue, not Economic Dialogue? It seems to me after the Bush Administration came into office, the word "strategic" became something of a dirty word because the previous administration used to refer to the strategic partnership between the United States and China. However, when the Bush Administration came over, even during the campaign, President Bush, or Governor Bush in those days, referred to the relationship as a competitor, not partner, okay? This is my first question.

And the second one; you know, there are so many economic issues between China and the United States: IPR, currency, the trade imbalance. I wonder, just based on the SED, do you really expect to eventually resolve the issues, especially the staggering trade imbalance? I might as well mention the fact that there is a famous Chinese saying, literally translated as "Fight, fight, talk, talk." So now the dialogue is talk, talk; perhaps this only camouflages the real strategy of fight, then -- fight. I don't know; do you have any thoughts about that as well?

AMBASSADOR HOLMER: Right. Well, let me try to -- I'll address your questions in reverse order.

First, in an earlier life, I was Deputy U.S. Trade Rep in the second term of the Reagan Administration and we didn't have many trade issues at that time with China and we didn't because we didn't have much trade with China. And to an extent, the fact that we have trade frictions or issues that we need to address is a positive sign in a maturing economic relationship, that if you have over $300 billion in bilateral trade, inevitably, there are going to be tensions with respect to those issues.

And we were also very careful in establishing the Strategic Economic Dialogue to make sure that this is not -- the dialogue is not intended to replace the U.S. trade remedy laws. It's not intended to replace the existing bilateral mechanisms that might be utilized to address specific short-term issues. And it's not intended to replace WTO dispute settlement process.

Now why the word "strategic?" Because we wanted to emphasize that we're not focused on the short-term issues, on the issue of a particular day. We did want to be able to say we're trying to lift this discussion up to look longer-term, to look strategically in terms of where it is that we want this economic relationship to be going forward. And the key way to be able to do this is to address the broad overarching issues that I've described.

You ask, in part, can -- is it possible to address the trade imbalance that exists between the United States and China and exists between China and the rest of the world. Absolutely, but the key way to begin to do that is to address the issues with respect to rebalancing of economic growth, which is what I described earlier in my remarks, and one of the key areas that's going to be discussed at the meetings next week.

MODERATOR: Any other folks? Go ahead.

QUESTION: With regards to currency, is that going to be discussed in such that -- a rebalancing growth or where is that going to be discussed?

AMBASSADOR HOLMER: It seems that we discuss currency at every meeting and exactly where it will fit into this session of the dialogue, I am not precisely sure. But I do want to emphasize how seriously the Administration takes the issue of the importance of the adjustment of China's currency. And we have had an unprecedented level of engagement with the Chinese in urging them to move to a flexible market-based exchange rate. We're also working with other countries, the IMF and other international institutions, to impress upon the Chinese the need to take timely action. So this issue is certainly going to be discussed at the SED next week, full stop.

MODERATOR: Anybody else? Why don't we get right there and there.

QUESTION: My name is Yong Tang from People's Daily, China. My question is, some experts said there should be tenable results produced from this SED meeting; otherwise, the congressmen will take much stronger measures against China. Do you think -- what kind of tenable results could possibly silence the congressmen? Thank you.

AMBASSADOR HOLMER: That is a good question and as I indicated, we plan to have discussions and results in each of the major four areas that I described: in the area of financial services, in the area of -- we're looking at non-financial services and one area in particular where there are especially intense discussions right now is with respect to civil aviation. And we expect to have specific results that we'll be able to describe with respect to energy and the environment, also with respect to innovation and also with respect to rebalancing growth.

I'm not in a position to be able to describe, at the moment, what those outcomes might be. And you probably need to go and speak specifically with members of Congress with respect to what would be sufficient from their perspective for them to be satisfied with the work of the Strategic Economic Dialogue.

But as I said before, the concerns expressed by members of Congress do reflect the concerns of the American people, but in all the conversations -- I've been spending a lot of time up in the Congress, as has Secretary Paulson -- members of Congress do recognize how tremendously important it is to be able to get the economic relationship with China right. And I think they have great confidence in Secretary Paulson and how hard he is working in the Strategic Economic Dialogue to be able to keep our bilateral relationship on an even keel, to be focused on the long-term and strategic issues, and yet at the same time, to be able to achieve tangible results along the way.

MODERATOR: We have one last one here.

QUESTION: Yeah, I'm Liu Hong from Xinhua News Agency. As to the huge trade deficit, Chinese companies have signed a series of deals that is worth billions of dollars in the past two weeks. What's your response to China's efforts? Thank you.

AMBASSADOR HOLMER: I think anytime Chinese businesses purchase more products from American companies, that's a good thing. But what we are looking for in this dialogue is long-term structural reforms and opening of the Chinese economy, addressing the issues that I've talked about with respect to financial services and non-financial services, investment, transparency, rebalancing growth, and all of those issues.

So purchases are always good, but the focus of the U.S. Government has been on these long-term strategic issues that I've described.

MODERATOR: Ambassador Holmer, thank you very much. Thank you all for waiting.