Tuck

Slaughter & Rees Report - Leaping Fish and Flying Birds

July 14, 2014 --

The U.S.-China relationship is never simple, and its complexity was on full display last week. High-level officials from both countries met in Beijing for the sixth bilateral Strategic & Economic Dialogue (S&ED). It featured the usual bromides from President Obama and President Xi about cooperation. But the happy talk was rudely interrupted by The New York Times, which on Thursday featured a front-page article detailing how Chinese hackers had penetrated the computer networks of the U.S. government’s personnel agency.

Hacking or no hacking, relations between the United States and China are destined to be bumpy. As we noted in an earlier missive, China is facing an economic slowdown—the target GDP growth rate this year of 7.5 percent would be the slowest since 1991—and the country needs to reduce its reliance on investment and exports. There are no handy step-by-step instructions for how a developing country with a population approaching 1.4 billion makes this transition. As China improvises, policy squabbles with the world’s largest economy are inevitable—especially when that economy is itself sluggish and is also pondering the World Bank’s recent declaration that China’s will soon be the world’s largest economy.

Further complicating this relationship is China’s growing military assertiveness. As the country has been making new maritime claims across Asia, the United States has been beefing up its security ties with nations such as Japan and the Philippines. And while last week’s disclosure of cyber-hacking wasn’t tied directly to the Chinese government, in May the FBI indicted five members of the Chinese military for offenses including computer hacking and economic espionage.

Amidst these gloomy clouds there is at least one silver lining. We were pleased to see the U.S. Treasury Secretary, Jack Lew, make a strong statement about the United States welcoming foreign direct investment from China: “Chinese firms are making important contributions to U.S. output and employment, and are valued members of the communities in which they invest.”

We hope the S&ED might spark action on one of the most important U.S.-China initiatives: a bilateral investment treaty (BIT). BITs eliminate thickets of restrictions that curtail FDI; they also create protocols for resolving disputes. Last year the U.S. and China traded $562 billion in goods and services, yet the total stock of bilateral FDI remains only about $60 billion. This stock has increased sharply in just a few years, but it is still quite small.

The U.S. and China launched BIT negotiations in 2008 but they languished for years. Now, both sides are voicing intent to move forward, with President Xi declaring last week that, “The two countries should speed up BIT talks and try to make a high-standard, balanced agreement as soon as possible with the aim of improving economic relations between China and the U.S.”

One of the many BIT benefits could be offsetting other economic tensions. A new World Bank report authored by our friend Chad Bown has analyzed one growing friction: new trade barriers. Bown points out that 6.7 percent of U.S. exports to China are today facing non-tariff trade barriers, such as anti-dumping duties. The U.S. hardly has clean hands on this front: 9.1 percent of China’s exports to the U.S. today face non-tariff trade barriers. And, the evidence suggests that China’s barriers often follow U.S. anti-dumping announcements. A robust BIT might help de-escalate politicized trade tiffs like these—in addition to fostering innovation and job creation in both countries, as Charlene Barshefsky and Long Yongtu explained in their insightful Wall Street Journal op-ed column last week.

President Xi, who fashions himself something of a poet, used flowery language during the S&ED to frame the U.S.-China relationship: “The immense sea allows fish to leap at liberty; the vast sky lets birds fly freely. The broad Pacific Ocean has ample space to accommodate our two great nations.” Whatever the language, President Xi’s sentiment is the right one. The United States and China can co-exist in ways that benefit each other and the wider world. Conversations such as last week’s S&ED are necessary to achieve such coexistence. But conversations alone are not sufficient: they need to lead to tangible policy progress such as a BIT would bring.

Articles © 2014 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2014 Trustees of Dartmouth College. All rights reserved.

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