Exclusive: The Sham Dialogue with China

The Fourth Strategic Economic Dialogue (SED) between the United States and the People's Republic of China took place at the U.S. Naval Academy in Annapolis and other venues in Washington, June 17th-18th. 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. Though top officials from many departments and agencies take part, the Treasury is the leader on the American side. As expected, nothing came of this grand gathering in terms of helping American industry compete against Chinese producers. It was another installment of the "chit chat" diplomacy conducted by the business side of the Bush administration which is meant more to smooth over problems to avoid Congressional action. Indeed, using the term "dialogue" instead of "negotiation" was a purposeful choice to lower expectations, and to project an air of cooperation rather than confrontation.

Treasury Secretary Henry Paulson's opening statement this year was very bland, marking the downward spiral of these events. One of the great success stories of these large, high-level meetings he cited was the opening of non-stop flights from Atlanta to Shanghai! But at least he did not make the same mistake he made last December in Beijing. There he said, "The United States welcomes the rise of a stable and prosperous China," leaving out the third adjective "peaceful" found in most U.S. documents. This crucial third term is meant to convey America's concern that Beijing will translate its economic gains into military power aimed at the U.S. and its allies. China, of course, is already doing this, but it's a topic about which Paulson has no interest.

Instead, Paulson has attacked the very concept of national interest in economic policy. At the Third SED he said, "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 U.S. are not sure...that the benefits of trade are being shared fairly." This is an understatement! The current trade imbalance runs 5-1 in Beijing's favor.

It should be remembered that before he became Treasury Secretary, Paulson was CEO of Goldman Sachs, which calls itself a global investment banking firm. He made a fortune working with the Chinese on profitable business deals, including raising money for the Communist regime itself.

Beijing's currency manipulation, supposedly the main issue behind the creation of the SED, has not ended. The Chinese renminbi (RMB) has risen about 20% in nominal terms since July 2005, but the United States still ran a record trade deficit with China of $256 billion in 2007. The Chinese have been slowly testing where to set their currency's value. As prices rise for the oil and raw materials that China imports, there is a desire to increase the RMB's purchasing power, but Beijing's first priority remains strong exports to bolster its economic growth. The RMB will not be allowed to rise to a level where it hurts exports. This will be especially true if China's trade surplus falls due to a slowing U.S. economy. Beijing will not want to add to that decline by losing the competitive advantage it gets from an undervalued currency. 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 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 foreign interests. Beijing might offer larger minority shares to outside investors to get their money, but China has made it clear that it will never give foreign interests control over any important segment of its financial system. Paulson's argument that American bankers can teach the Chinese modern business methods has lost is appeal in the wake of the subprime mortgage-derivatives meltdown.

Paulson hailed the opening of a branch of the China Merchants Bank in the United States. He has 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 United States. No reciprocity is required. China Merchant Bank has 64% 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.

Beijing often makes small, symbolic gestures before a major meeting to look like it is being flexible. Once the meeting is over and the press releases filed, it goes back to its old behavior. For example, just before the SED opened this year, there was the usual flurry of announcements of American firms landing export deals in China, but these will not narrow the trade gap. That Ford will get to sell 30,000 U.S.-made cars in China next year is hardly a drop in the bucket.

The Treasury seems eager to appease Beijing's demand that the United States weaken its national security restrictions on trade and investment. Treasury Special Envoy Alan Holmer told a Chinese audience on May 21st that new rules had been issued by his department to "reinforce strong open investment principles" in reviews conducted by the Committee on Foreign Investment in the U.S. (CFIUS), a multi-agency group chaired by Treasury which has the power to block or modify business deals that threaten American security. Speaking at Wuhan University, Holmer said, "we often hear concerns from China about the U.S. investment review process and whether the United States truly welcomes Chinese investment. U.S. legal authority in this area is narrowly targeted to address acquisitions that raise genuine national security concerns, not broader economic interests or industrial policy factors."

One of the first things the 110th Congress did was strengthen and expand the CFIUS process by passing the Foreign Investment and National Security Act of 2007. This legislation passed unanimously in the House and by voice vote in the Senate. It was signed by President Bush. Unfortunately, it still left Treasury in the CFIUS chair, despite a warning from the Government Accountability Office (GAO) that the process "in protecting U.S. national security may be limited because Treasury - as Chair of the Committee on Foreign Investment in the United States - has narrowly defined what constitutes a threat to national security."

The first successful test of the improved CFIUS process involved a Chinese firm. Huawei Technologies tried to purchase a stake in 3Com, a U.S. firm that makes computer network security software for the Pentagon. When it became apparent in March that CFIUS was not going to approve the deal, due in part to objections raised by the Director of National Intelligence (who had been named as an advisor to CFIUS in the 2007 law), the offer to buy 3Com was withdrawn. But now, three months later, Treasury is trying to assure Beijing not to worry about security reviews in the future! Indeed, at this latest SED, the groundwork was laid for the U.S. and China to negotiate an investment treaty, which would take precedence over CFIUS procedures and kick the American door wide open to Chinese money (and influence).

Treasury seems oblivious to the fact that Beijing and Washington are geopolitical as well as economic rivals. China has used the gains from trade and investment to strengthen its capabilities. It has been foolish to allow Beijing to amass its currency hoard ($1.6 trillion and growing) through an unequal trade policy. It would be even more irresponsible to allow Beijing to use its money any way it pleases to support ambitions which are at odds with American strategic interests. But despite having the term "strategic" in the title of the SED series, there is no sign that the Treasury understands the term or has any interest in learning what it means.

William Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council in Washington, DC. E-mail him at HawkinsUSA@aol.com.