Discussions surrounding cyberattacks on the US government's Office of Personnel Management and China's ongoing land reclamation work in the South China Sea will undoubtedly dominate the strategic track of the upcoming US-China Strategic and Economic Dialogue.
The S&ED's economic track, although lacking the attention-grabbing headlines of the heated strategic exchanges, may have far greater long term implications.
The world's first- and second-largest economies are going to-toe-toe, after all, and with the continuing economic recovery of the US and EU hanging in the balance, the talks in Washington DC this summer will be watched by more than just the usual scrum of eggheads and bean counters.
High Stakes
Negotiating with China on exchange rate liberalisation or a bilateral investment treaty (BIT), to name a few of the thornier tracks in the US-China S&ED, must rank high among the most exasperating jobs on the planet.
The talks will convene for its 6th round in late June, a few short months before Xi Jinping’s first state visit to the US in September. Last year’s agreement to base future BIT talks on a so-called negative list — a definitive list of sectors off-limits to US investment — was viewed as a major development. That gives some indication of just how much of a slog the process has been. By comparison, China, Japan and Korea — not so chummy at the best of times — managed in May 2014 to ratify a trilateral investment treaty, albeit one that falls below US standards of transparency and intellectual property rights protection.
China made some fairly ambitious statements at the conclusion of the 5th round last year regarding the expansion of opportunities for US financial services providers, indicating a willingness to further open securities and futures sectors and to review policies that would allow greater equity stakes by foreign investors in its banking industry.
Beijing also said it would revise laws pertaining to the enforceability of close-out netting for derivatives contracts and other regulations with the aim of safely developing debt and derivatives markets.
US securities firms and investment banks anticipate that this year’s S&ED may result in a further expansion of the business scope of securities joint ventures. The US firms are pressing for larger equity stakes to allow them to compete with Chinese financial institutions.
US financial institutions believe there is much to gain from the further liberalisation of the market. Goldman Sachs, for one, has stimulated the dialogue, hosting forums in China and the US on the BIT and improved reciprocal market access activity in general. “We now feel that both China and the US are committed to reaching an agreement on bilateral trade and foreign direct investment,” said Mark Schwartz, chairman of Goldman Sachs Asia Pacific.
Regarding foreign ownership of financial institutions in China, the Wall Street bank has been plainspoken. “We’ve always expressed a desire to own our own business in China as we do in every other market in the world,” Schwartz told FinanceAsia. That said, “China has historically implemented reforms in a very gradual way and so ownership and access issues may still take some time to resolve.”
Flaws and Laws
A diplomat might attribute the lack of verity at these events to cultural differences. In talks where the parties hold world views that are worlds apart and come from vastly different political cultures, there are bound to be instances of balderdash.
Take China’s approach to competition. China insists that it does not selectively apply its 2008 anti-monopoly law to foreign firms. US chipmaker Qualcomm might beg to differ. Joined by others, including Microsoft and Chrysler, US multinationals believe the anti-monopoly probes were part of a protectionist campaign approved by Beijing and supplemented by attacks on foreign firms in the state-controlled press. The matter was added to the S&ED's agenda.
China’s negotiators are a savvy lot, much like their US counterparts. The stone-faced apparatchik is a guise. So some Western diplomats find it difficult to reconcile backward policies — like the anti-monopoly cases — with the affable Chinese bureaucrats that they have come to know personally.
China strives to present a unified face at these summits; concealing factionalism within the one-party state is a priority. But some China watchers contend that the anti-monopoly probes came about as a result of infighting between “leftists” within the party who want to protect domestic firms and free-market “rightists”.
The S&ED is intended to play a leveling role, a confab where cooler heads can prevail. Hank Paulson, the former Goldman Sachs chief and treasury secretary under George W Bush gets credit for recognising the need for such a dialogue. Paulson got Bush to sign off on the bi-annual Strategic Economic Dialogue, the S&ED’S predecessor. He had been to China with Goldman Sachs many times and could see this was going to be a long, fraught process.
The Obama administration saw the utility of the SED and rebranded it, with Tim Geithner, the new treasury secretary at the time, heading up the economic track. While neither Geithner nor his successor Jack Lew shared Paulson’s China passion or portfolio, they took to the challenge with alacrity, using the talks as a venue to review Chinese compliance with its ascension agreement to the World Trade Organisation and to assess whether disclosure and transparency rules were adequate to maintain the integrity of US capital markets as more Chinese firms sought a New York listing.
Obama continues to support the dialogue. The refreshing if undiplomatic flash of impatience he showed at the Asia-Pacific Economic Cooperation summit in Hawaii in 2011, when he accused China of “gaming the system” by playing fast and loose with trade rules, has not been repeated. But perhaps it was enough. After all, talks have yielded a negative list.
