SED: PAULSON-BO XILAI MEETING

1. (SBU) Treasury Secretary Henry Paulson met with Minister
of Commerce Bo Xilai on September 21 to outline U.S. goals
and expectations for the Strategic Economic Dialogue (SED).
Secretary Paulson emphasized the need for currency

SIPDIS
flexibility and asked for Chinese support in reinvigorating
the stalled Doha Round. Minister Bo welcomed the
initiation of the SED, and emphasized the importance
President Hu Jintao places on it. Bo said he looks forward
to developing a strong working relationship between the SED
and the Joint Commission on Commerce and Trade (JCCT).
Minister Bo also stated that he believes the Schumer-Graham
Bill, if enacted, would have a negative impact on U.S.-
China relations. End Summary.

Passage of Schumer-Graham Would Damage Relations


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2. (SBU) Minister Bo discussed possible repercussions of
the Schumer-Graham Bill becoming law. He posited that the
bill, if enacted, would damage U.S.-China economic
relations. He added that the bill likely would force
China's economic community to respond and would lead to
increased protectionism. Bo noted that the U.S.-China
trading relationship is not as bad as some policymakers in
the United States believe. Bo said: (1) U.S. exports
increased by 20 percent to China, (2) most of China's
exports were produced by foreign invested enterprises, and
(3) the Asia-Pacific region's overall share of the U.S.
trade deficit had declined by 14 percentage points from 57
percent in 1999 to 43 percent in 2005.

Exchange Rate Flexibility Would Help Contain Protectionism


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3. (SBU) Secretary Paulson stated that by introducing the
Schumer-Graham Bill, the two Senators seek to respond to
their constituents' concerns. Paulson assured Minister Bo
that both he and President Bush deem protectionist
sentiments to be unhealthy for an economy and that he would
do everything he could to dissuade the Senate from passing
the bill, and in any case, even if it passed the Senate it
was unlikely to become law. In response to Bo's point
about the bill's potential damage to the U.S.-China
economic relationship, however, Paulson highlighted the
continuing negative impact of China's reticence on exchange
rate flexibility and other bilateral issues, especially at
a time when many Americans fear for their jobs.



4. (SBU) Secretary Paulson stressed that a freely tradable
currency allows for efficient use of capital, ensuring that
investors receive good returns and savings are recycled
effectively. A more efficient financial system would
support continued economic development in China and thereby
promote social stability. Minister Bo stated that
establishing a flexible rate would be good for China in the
long-term, but he contended that China's cheap cost of
labor would always give them a competitive edge even when
China begins to export higher technology products and as
such would have a limited impact on trade imbalances.



5. (SBU) The Minister concluded with a request that the
United States reduce its agricultural subsidies to its
farmers. Secretary Paulson said that the United States
supports fair trade agreements but that Congress is not
likely to pass new agreements without increased access to
other markets. Paulson praised China for allowing U.S.
agricultural products access to its market and sought
China's help in opening closed markets such as India,
Brazil and the European Union.



6. (U) Participants:

United States

Henry Paulson: Treasury Secretary
Clark T. Randt: United States Ambassador to China
Al Hubbard: Director of the National Economic Council and
Assistant to the President for Economic Policy

BEIJING 00021160 002 OF 002


Tim Adams: Treasury Under-Secretary for International
Affairs
Dan Sullivan: Assistant Secretary of State for Economic and
Business Affairs
Tony Fratto: Treasury Assistant Secretary for Public
Affairs
Deborah Lehr: Counselor to the Secretary of the Treasury
Bob Dohner: Treasury Deputy Assistant Secretary for Asia
Taiya Smith: Deputy Treasury Chief of Staff
Mathew P. Haarsager: Treasury Director-Office of East Asia
Benjamin Cushman: International Economist Treasury
International Affairs Office for East Asian Nations
David Loevinger: Minister-Counselor for Financial Affairs
Hugo Yon: Assistant Financial Attach
Oz Tat: Economic Officer, Notetaker
Jim Brown, interpreter

China
Minister of Commerce Bo Xilai
Vice-Minister of Commerce Ma Xiuhong
DG Shang Ming, Department of Treaties and Law
DG He Ning, Department of American and Oceanian Affairs
DG Wang Shouwen, Bureau of Fair Trade
Secretary General Xiang Xin, Market Order Rectification

SIPDIS
Office
DDG Sun Peng, Foreign Investment Administration
DDG Zhou Ping, Department of Protocol
Liu Haiyan, Department of American and Oceanian Affairs

RANDT