China, US to tackle trade issues at high-level dialogue

WASHINGTON - Senior Chinese and US officials will gather on Monday in Beijing to kick off the eighth Strategic and Economic Dialogue (S&ED), the last for the Obama administration, to discuss a wide range of economic issues from macroeconomic policy, investment treaty to industrial overcapacity and trade disputes.

The annual high-level dialogue also coincides this year with China hosting the Group of 20 (G20) summit and the United States holding presidential elections. While it's too early to tell what specific outcomes the two sides could get from the two-day dialogue, past experiences suggest that maintaining regular dialogues and continued engagement between the world's two largest economies is increasingly crucial to both countries and the global economy.

Fed rate hikes & renminbi exchange rate

"I think the top priority will be, as always, talking about macroeconomic cooperation and how the two countries manage their economies. The United States remains concerned about the RMB (renminbi) exchange rate and about China' s growth," Rory MacFarquhar, a visiting fellow at the Peterson Institute for International Economics and a former special assistant to President Barack Obama for international economics, said of the economic track of the upcoming S&ED.

"This is a very important mechanism" to bring together quite a large number of the US Cabinet and the Chinese State Council high-levels to really hear each other's perspective on a wide range of specific issues and achieve useful outcomes, MacFarquhar told Xinhua.

David Dollar, a senior fellow at the Brookings Institution and a former official of the US Treasury Department, said it's very important for both sides to have "a frank conversation about macroeconomic and financial policies" this year, as the Federal Reserve weighs its next interest rate hike in coming months.

The Fed will hold its next policy meeting just a week after the China-U.S. high-level dialogue. Expectations of a Fed rate hike as soon as this summer have pushed up the value of the US dollar and increased the downward pressure of the RMB, or yuan.

"China will be very interested in hearing what the Federal Reserve thinks," Dollar wrote in a blog post on Wednesday. "Regardless of when the Fed moves, both China and the United States have an interest in seeing a relatively stable exchange rate for the yuan."

The policy actions of the United States and China have never been so closely connected. A relative stable RMB exchange rate will help China engineer a smooth economic transition and maintain a stable financial market, which could pave the way for the Fed to further raise interest rates. Clear communications of Fed's decision-making will also help reduce global market uncertainties and capital outflows from China, avoiding a large devaluation of the RMB to some extent.

The Fed should communicate better with China and financial markets on its interest rate decisions, China's Vice Finance Minister Zhu Guangyao said Thursday, noting that the world's two largest economies should also strengthen policy coordination and cooperation.

"The most important outcome of the S&ED may well be avoidance of policy mistakes, a subtle outcome that will not be reflected in headlines," Dollar said.

Investment treaty talks

Talks on a bilateral investment treaty (BIT) certainly will be high on the agenda during the upcoming S&ED as BIT negotiations have been considered the most important issue in the two nation's economic relationship.

"Near-term completion of a high quality BIT is the most significant opportunity to promote more bilateral investment," business leaders and former senior officials of China and the United States said in a joint statement after holding an annual dialogue last month. "No investment relationship in the world has greater potential than that between the U.S. and China."

While participants in the dialogue conceded that they might have differences regarding the scope of a BIT, they agreed to advocate with the Chinese and US governments for "the timely conclusion of such an agreement by the end of this year."

Erin Ennis, senior vice president at U.S.-China Business Council, hoped that China would come up with a new "negative list" offer, which outlines sectors closed to foreign investment, during this S&ED to push forward the investment treaty talks.

"I think we have to be realistic," Ennis told Xinhua. "I do worry that there's simply not enough time between now and the end of December to conclude something, if they don't work it out soon."

The last time the two sides exchanged their negative list offers was in early September last year, days ahead of Chinese President Xi Jinping's state visit to the United States.

A total of 24 rounds of investment treaty talks have been held since negotiations started in 2008 as both countries sought to increase mutual investment.

China and US officials have repeatedly signaled willingness to finalize a deal before Obama leaves the White House in January 2017.

Industrial overcapacity & trade disputes

The high-level dialogue also comes at a time when US steel producers increasingly resort to trade remedy and tariff protection to ride out a sluggish steel market, as steel excess capacity has become an acute global challenge.

The US has overtaken India as the leading user of anti-dumping and anti-subsidy investigations, with China and its steel sector the biggest target, according to a recently-released annual Global Trade Protection Report.

The United States would encourage China to reduce excess industrial capacity in its key base metals sectors and "make supply in these sectors more sensitive to underlying domestic and global demand conditions," Nathan Sheets, US Treasury's undersecretary for international affairs, said last month at a Brookings event to preview the upcoming S&ED.

But China opposes abuse of trade remedy measures, Zhu said Thursday, adding that both parties should abide by WTO rules and hold dialogues to solve trade disputes.

"We should oppose trade protectionism in the context of the principle of free trade, which is agreed upon by and serves the interests of both countries," he said.

US trade experts have also warned that resorting to protectionism will not cure the US steel industry's grave ills, and import restrictions serve to harm the overall US economy rather than help it.

As bilateral trade and investment between China and the U.S. have rapidly expanded in recent years, it's inevitable that problems and contradictions will emerge. But the S&ED mechanism has played an important role in promoting mutual trust, managing differences and avoiding miscalculation in bilateral economic relations, experts said.

"As this year's S&ED will be the last under the Obama administration's leadership, I must stress that continued cooperation with China on the diverse set of issues covered in the S&ED is crucial- not just to our respective countries, but globally as well," Sheets said.

"The last one will be extremely important as ever, perhaps even more so, given the current election season in the United States, to demonstrate that the approach to bilateral relations of sitting down and talking through problems leads to better outcomes than the alternative approach, which involves threats and more coercive forms of interactions," MacFarquhar said.

"It will be important for both sides to demonstrate that engagement yields real tangible results that the peoples of both countries can actually feel, and that are contributing to create jobs and their economic wellbeing," he added.

Dollar also agreed that this S&ED is "a good time for China and the United States to demonstrate that regular, high-level exchange produces results, increasing the likelihood that whatever administration comes next will want to maintain something similar."