SBC Subcommittee Reviews U .S.-China Strategic and Economic Dialogue

AT TODAY’S SENATE BANKING SUBCOMMITTEE HEARING, lawmakers reviewed ways to enhance economic cooperation between the U.S. and China, and identified strategies to create a level playing field between the two nations. 

Subcommittee Chairman Mark Warner (D-Va.) said “there’s some evidence of progress” between the two nations on economic issues. Warner said reforming China’s economic policies and modernizing its financial services industry “present real opportunities” for a positive U.S.-China economic relationship. 

Warner also asked the witnesses to give their opinions about Treasury’s decision to allow the Chinese to bypass an intermediary to buy U.S. treasuries. Warned did not revert back to this issue and no panelists discussed it during the question and answer session. 

Ranking Member Mike Johanns (R-Neb.) said “China presents an extraordinary opportunity… but also presents extraordinary challenges.” He said he was encouraged by the recent news coming from China that the Chinese leadership is beginning to understand the importance of transitioning to a consumption-based society. However, Johanns described a few issues that still need to be worked out including: 1) currency valuation; 2) intellectual property enforcement; 3) transparent regulatory system; and 4) an open financial services sector that will allow U.S. and foreign institutions to access the Chinese marketplace. 

Sen. Sherrod Brown (D-Ohio) focused on the Bilateral Investment treaty (BIT) saying that while it will pave the way for more investment into China, he asked whether it would be useful to promote exports and reduce barriers to banking services.  

Testimony 

In his testimony, Stephen Roach, Senior Fellow at Yale University’s Institute of Global Affairs, said there is “no international issue that is of greater importance… than the [U.S.] economic relationship with China.” He added that there has been “far too much emphasis” from Congress on the currency issue and that this approach “has outlived its useful existence.” A new framework is needed to address China not as a threat but as an opportunity. Market access is the new issue, Roach said and instructed Congress not to “waste your time” by continuing to press on the currency issue. 

In his testimony, Fred Bergsten, Director at the Peterson Institute for International Economics, proposed the US and China create an “informal G-2” to help steer the world economy, noting that progress is impossible on the world stage without US and Chinese agreement. Bergsten said the “most overt and visible step in creating the G-2 is the frequent meetings between China and the U.S.” The S&ED “was by far the most extensive institutionalization of this concept,” he said.  

Bergsten disagreed with Roach’s view that the U.S. should not continue to press on the currency issue, saying the U.S. has “rightly focused on the issue” and that it is apparent that the U.S. strategy has succeeded “to a substantial degree” in correcting China’s currency valuation. 

Bergsten also said that it is difficult to address economic issues between the U.S. and China in an ad-hoc manner, adding that the U.S. government’s use of the World Trade Organization (WTO) to resolve disputes is “not enough.” He advocated for a bilateral trade agreement between the two countries that would provide a comprehensive framework to deal with a growing list of economic issues between China and the U.S. If not a U.S.-China free trade agreement, an alternative would be to bring China into the Trans-Pacific Partnership (TPP) discussions currently taking place. “Any effort like this would represent an extension of the G-2 concept into the trade policy arena,” he said. 

In his testimony, John Dearie, Executive Vice President for Policy at the Financial Services Forum, said activating the Chinese consumer requires broad availability of financial services products “that will eliminate the need for precautionary savings on the part of the Chinese.” The recent Strategic and Economic Dialogue (S&ED) made “incremental, but meaningful progress,” but the Chinese authorities still impose substantial restrictions on financial firms operating in China, he said. 

Dearie said the fastest way to develop a modern financial system in China is to open the financial sector to allow for greater participation by foreign institutions. Increased participation will help China develop an economy that is consumption-driven, which will expand their market for U.S. goods and services, he asserted 

In his testimony, Dean Garfield, President and CEO of the Information Technology Industry Council said while there have been some successes against intellectual property theft, “it continues apace” and domestic efforts to correct “are inconsistent with global norms.” Garfield said one major challenge to address was other countries mirroring China’s indigenous innovative policies, “which are problematic.” 

Question & Answer 

Johanns said Bergsten’s trade agreement proposal was “an interesting approach” but noted that trade agreements are a “complicated process.” On top of the S&ED, which Johanns said “worked quite well,” would be to list out economic areas of interest between the U.S. and China and continue to discuss those issues in-between S&ED discussions. 

Bergsten said this idea was “highly desirable” as it would foster cooperation and communication between the two nations.  

Dearie agreed with Johanns suggestion, but said that sort of engagement needs to be coordinated with Europe as China has historically used a “divide and conquer strategy.” Dearie also expressed concern with the fact that the S&ED is held only once a year, saying this “limits the progress that can be made.” 

Roach said a collaborative network between the U.S. and China “is really gaining momentum right now.” He said a succession to a rules-based WTO framework is one of the most important developments within the last decade. While the U.S. may not like some of the rules, “it is a means of accountability we can rely on.” Roach added that a free trade agreement between the two countries is “not a realistic goal for the foreseeable future.” 

In concluding, Johanns said the recent movements and statements by Chinese officials to a more consumer-driven economy “does provide great opportunities for us,” but noted the challenge China has in developing the infrastructure the country needs to make this economic shift become a reality. “That, in itself, creates opportunity for cooperation with the U.S.,” he said. 

Warner discussed the importance of collaboration between the U.S. and its international peers in developing an organized approach to China. He also expressed concern about Chinese state-owned enterprises increasing their dividends and asked the panel for their thoughts on these issues. 

Dearie agreed that international cooperation is vital when engaging in economic dialogues with China. He also said the heightened dividends by Chinese state-owned firms “is a good thing,” as increased dividends lead to greater payouts which is a “step in the right direction” if China is to turn to a consumer-based, consumption-driven economy.  

For more information on the hearing, please click here.