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Slaughter & Rees Report - Why the Strategic and Economic Dialogue Matters

July 15, 2013 -- 

In 2006, Presidents Hu Jintao of China and George W. Bush of the United States realized they had a problem. The economic links between their two countries were deepening and widening by the hour, but the policy conversations between the countries were not keeping pace. These policy conversations were both fragmented and fussy:  one set of economic agencies debating trade in chicken parts and dead cows, another bickering over the yuan-dollar exchange rate, and so forth.

So these two leaders did what good leaders in the private sector often do. They created time and space for their key people to talk strategically: i.e., to synthesize, weigh, and prioritize issues in a way that would guide delegates at lower levels towards more thoughtful and constructive goals. Thus was born in Beijing in December 2006 the Strategic Economic Dialogue (SED) (which one of your correspondents attended).

The good news is that seven years on, the policy leaders of the world’s two largest economies continue to talk this way. Last week in Washington the latest round of what is now called the Strategic and Economic Dialogue was held. These meetings, which came just a month after President Barack Obama held a mini-summit with President Xi Jinping, voiced important aspirations about a number of high-level economic issues central to the growth and prosperity of both nations.

The less-than-good news is that the policy challenges confronting the two countries have only become more and more complicated—and thus are demanding wiser and more-decisive action from their leaders.

We think the biggest concern confronting the SED partners is how to accommodate China’s slowing economic growth. Chinese GDP grew 7.8 percent in 2012. Almost any other country in the world would envy that rate. For China, however, this was the slowest growth since 1999. Indeed, in 2007, the year after the SED launch, China’s GDP grew a remarkable 14.2 percent. Those halcyon days are gone. This year’s first-quarter growth in China was just 7.7 percent. Last Wednesday China’s government announced that June exports fell 3.1 percent from a year earlier. Zheng Yuesheng, spokesman for China’s customs agency, won Understatement of the Week Award in commenting, “Our country is facing serious challenges.”

Indeed. After China started its “open-door” policy liberalizations in agriculture in 1978 in the wake of the death of Chairman Mao (and all the related economic and social chaos of the Cultural Revolution), China grew at an average annual rate of about 10 percent for over 30 years. Each year about 2 percentage points of that growth was accounted for by growth in the Chinese labor force. But the actuarial implications of China’s 34-year-old one-child policy are now starkly playing out. China’s total labor force of about 800 million has reached or is soon to reach its peak. By 2030, nearly 25 percent of China’s population will be over the age of 65, according to the World Bank. Barring a dramatic and unexpected liberalization of immigration into China, it is now hard-wired to face slower annual GDP growth by about 2 percent because its labor-force growth has ended. Indeed, with per capita GDP in China last year still at only about $7,000, concern is widening that China is “growing old before growing rich.”

Twice-a-year dialogues (often jet-lagged and requiring translation, which together cut the effective work time by about half) cannot magically accelerate Chinese growth. But if the leaders involved take seriously the opportunity these dialogues present—if they roll up their sleeves, order an extra pot of tea or coffee, and talk frankly about delicate matters—they can agree to focus their policy-making delegates on what matters most for both countries.

Here is an example of how policy-making can meander without leadership from the top. In a case of you-can’t-make-this-stuff-up irony, last Wednesday as the SED was meeting at one end of Pennsylvania Avenue, at the other end on Capitol Hill the U.S. Senate was convening a widely covered hearing on whether the proposed acquisition of the U.S.’s Smithfield Foods, Inc. by China’s Shuanghui International should be permitted. We recently wrote a report about this transaction, and at this hearing one of us testified. For countless American companies today, their No. 1 concern about doing business in (or with) China is theft of their intellectual property. In Smithfield we have a potential transaction where a Chinese company has tendered billions of dollars to an American company to buy its world-class expertise, brands, and technology in a transparent, market-based deal. If the U.S. government ends up prohibiting this transaction, at future SEDs will Chinese leaders listen more or less when U.S. leaders inveigh about Chinese theft of American expertise, brands, and technology?

Articles © 2013 Matthew Slaughter and Matthew Rees. All rights reserved.

Publication © 2013 Trustees of Dartmouth College. All rights reserved.

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