PART 1 OF 2: CODEL GRAHAM-SCHUMER MEETING WITH

1. (C) Summary. In a March 23 meeting with Vice Premier Wu
Yi, Senators Lindsey Graham (R-SC) and Charles Schumer (D-NY)
strongly urged near-term reform of China,s exchange rate
policy as a key step to promote a successful April visit to
the United States and to preclude Congressional action on
China trade bills, including their own proposal to impose
27.5 percent tariffs on U.S. imports of Chinese goods. Wu Yi
said that bill would harm both Chinese and U.S. interests,
and likely would not withstand a challenge in WTO Dispute
Resolution proceedings. The Senators expressed cautious
optimism about what they had learned in earlier Beijing
meetings about Chinese intentions with respect to exchange
rate policy, but urged Chinese actions and statements to make
China,s case known to the American public, Congress and the
Administration. Wu Yi said exchange rate policies are
sovereign matters for each country to decide, and China could
not be faulted before the International Monetary Fund or WTO
for non-compliance with any rules in those organizations.
China will follow principles of self-initiation,
controllability and gradualism in expanding flexibility of
China,s floating exchange rate. China in the twenty-first
century is not Japan in the 1980s, and the United States
should not pressure China now as Japan was then. China will
never surrender to external pressure. Detailed points on
China,s exchange rate policy outlined by People,s Bank of
China Governor Zhou Xiaochuan at an earlier meeting will be
published at an appropriate time in the future.



2. (C) Summary continued: The bilateral trade deficit is
complementary, not competitive, Wu Yi asserted, with much of
the rise in the U.S. deficit with China attributable to
shifts of final manufacturing to China from other Asian
countries with which the United States had earlier trade
deficits. U.S. export controls on high-tech goods also
contribute to the trade imbalance. China will soon be
importing one trillion dollars of goods per year, and U.S.
firms could provide a large share of those imports. Chinese
trade and investment missions totaling 150 entrepreneurs will
soon visit the United States, with particular interests in
soybeans, cotton, computer software, aircraft, automotive
parts and machinery. Wu Yi will personally announce China,s
measures to improve IPR protection at the April 11 Joint
Commission on Commerce and Trade meeting in Washington.
Improved IPR protection in China is in China,s own interest,
and recent release of an IPR Action Plan is an historic and
important step by the Central Government. China will
establish 50 IPR complaint centers in cities across the
country over the next three years, and China is preparing to
join the WIPO Internet Treaties. IPR protection at trade
fairs in China has been enhanced. The Ministry of Public
Security will publish more data on IPR enforcement action
achievements by the end of March. Purchase of legitimate
computer software will be promoted to Chinese enterprises and
individuals. Still, IPR protection cannot be established
overnight in China, a developing country with a low level of
scientific and technological achievement. The Vice Premier
said China will welcome more visits by Senators,
Representatives and Congressional staff members. End summary.

Welcome to Zhongnanhai



3. (SBU) Vice Premier Wu Yi welcomed the Senators and said
she was pleased to have opportunity to get to know them. She
said the visit was the Senators, first to China, so they did
not have a realistic or good understanding of actual
conditions in China. While the Senators had said things in
the United States that were not friendly to China, China
still welcomes their visit with hospitality. She explained a
Chinese adage equivalent to "Seeing is believing," and said
Chinese officials had taken note of the Senators, growing
understanding of China as reflected in friendlier comments
made since their arrival several days earlier. These
comments encouraged Chinese officials. The Vice Premier
requested that she first address the issues of the exchange
rate, the trade imbalance, and intellectual property rights
protection in China followed by their points and discussion.
The Senators accepted the meeting host,s recommendation, and
she continued what became an hour-long discourse.

Exchange Rate Policy



4. (C) The Vice Premier noted that the CODEL had already
met with People,s Bank of China (PBOC) Governor Zhou
Xiaochuan, whom she described as a foreign exchange policy
expert and the official with the authority to make forex
policy decisions. Wu Yi said that China,s foreign exchange
regime complies with International Monetary Fund
requirements. Each country can decide its own exchange rate
mechanism, whether a floating exchange rate or managed
floating exchange rate. China,s exchange rate system does
not violate any WTO rules and China,s exchange rate actions
have been consistent with commitments undertaken when China
joined the World Trade Organization. The WTO is a
multilateral organization that lacks compulsory standards for
exchange rate matters and indeed lacks competence on exchange
rate issues. There is no internationally accepted definition
of "exchange rate manipulation."



5. (SBU) In order to further promote opening up and reform,
China on July 21, 2005 adjusted its exchange rate mechanism
to become a market-based managed floating rate with reference
to a basket of currencies. Since then, important measures
had been implemented to enhance that reform, stabilize the
market, streamline supervision and diversify products in the
Chinese financial market. Since the July reform, the
exchange rate had appreciated and depreciated, moving up and
down, and through March 20, the renminbi had appreciated more
than three percent. That three percent appreciation has been
helpful for the global economy and for the economies of
China,s Southeast Asian neighbors in particular. China had
received objective positive responses to its July reform.
The renminbi,s value can go up or down now in accord with
market forces and changes in currency markets.
Administrative measures to appreciate or depreciate the
renminbi are no longer an option for China, Wu Yi said.



6. (SBU) China will follow principles of self-initiation,
controllability and gradualism in reforming the exchange rate
mechanism and expanding flexibility of the floating exchange
rate. Through these principles, China hopes to achieve and
maintain a stable exchange rate at an adaptive equilibrium
level. China has a responsible attitude on the exchange rate.

-- Advice for America re China,s Exchange Rate Reforms



7. (C) The Vice Premier offered the following advice to her
visitors: Tell your American friends not to use methods from
the 1980s as were used against Japan. China is not Japan.
Those methods will not work on the Chinese people of the
twenty-first century. China will not surrender to external
pressure. The only acceptable way forward is through
dialogue on an equal footing. External pressure will lead to
a backlash from the Chinese people. Wu Yi concluded her set
piece on the exchange rate by acknowledging the CODEL,s
interest in detailed points outlined by PBOC Governor Zhou in
their earlier meeting and said that at an appropriate future
time, the points outlined by Governor Zhou will be published.

The U.S. Trade Deficit with China: Production and Surplus
Reallocations



8. (SBU) Wu Yi turned to the U.S. trade deficit with China,
noting the CODEL,s great interest in the topic and the
proposal she attributed to Senator Schumer alone for a 27.5
percent tariff on goods imported by the United States from
China due to an unfair Chinese exchange rate. Many
complicated causes contribute to the trade imbalance, and the
propaganda heard in the United States is not consistent with
the reality in China. The trade deficit is very much related
to industrial reallocation against the backdrop of
globalization. Different economic structures and different
levels of economic development between China and the United
States also are important contributing factors. In sum, the
trade imbalance is structural, complementary and not a
competitive deficit. She encouraged the professional staff
membrs in the CODEL to note the statistics she was bout to
enumerate.



9. (SBU) First, th U.S. trade deficit with China is a
matter ofreallocation. In the period from 1999 through
2005, foreign-invested enterprises in China amounted to
228,000 (as translated by the Vice Prmier,s interpreter).
Those 228,000 enterprises invested $355.1 billion in China.
Upon further analysis of these foreign-invested enterprises,
China had determined that 73 percent came from Japan, South
Korea, Taiwan, Southeast Asian countries and others who
already had large trade surpluses with the United States.
Among the 228,000 foreign-invested enterprises, more than 77
percent are export-oriented. In 2005, 83 percent of China,s
trade surplus was attributable to foreign-invested
enterprises in China.



10. (SBU) The U.S. trade deficit with China in 1999 was
$22.4 billion, Wu Yi continued. (Note: The Vice Premier,s
trade data is China,s data; USG trade data shows
significantly higher trade deficits in the years she cited.
End note.) By 2005, that had jumped to $110 billion. Before
1993, however, China had always run a trade deficit with the
United States, but that situation had reversed itself in


1993. China,s trade surplus with the United States comes
from companies and countries that had earlier surpluses with
the United States but those surpluses have now been
reallocated to China. In the 1999-2005 period during which
China,s trade surplus with the United States had expanded,
the trade imbalances between Southeast Asian nations and the
United States had narrowed. Wu Yi asserted that the U.S.
global trade deficit had decreased six percent in this same
recent six-year period. She also claimed that the U.S. trade
deficit with the rest of the world had increased from 43
percent in 1999 to 57 percent in 2005. The main cause for
the rising U.S. trade deficit is not China but lies with
other important trade partners of the United States.



11. (SBU) Wu Yi next cited a passage that she said came
from the 2005 Economic Report of the President and attributed
much of the U.S. trade deficit with China to manufacturing
operations established in China by Asian companies who then
shipped to the United States, moving trade surpluses to China
while their home country surpluses with the United States
decreased. This cited passage shows that the Economic Report
of the President finds that China is not the main cause of
the trade imbalance, she said.



12. (SBU) U.S. companies have more than 40,000 investment
projects in China. Many U.S. multinational companies have
established joint ventures and wholly-owned foreign
enterprises in China. They sell goods in China, replacing
goods formerly imported from the United States to sell in
China. They also sell to the U.S. market. The Vice Premier
thinks that this business pattern is a major reason for the
increasing U.S. trade deficit with China and another example
that reallocation of production is a major cause for the
trade imbalance between China and the United States.

The Trade Deficit: Complementarity of Economies



13. (SBU) The U.S. and Chinese economies are cut out for
each other, the Vice Premier stated, and the U.S. trade
deficit with China is a complementary deficit. Many types of
Chinese-made goods imported by the United States are products
that the United States no longer produces, such as
labor-intensive toys, apparel and shoes. So these Chinese
manufacturers are not competing with U.S. manufacturers.
Even if the United States were to cease importing such goods
from China, the United States would have to look to other
foreign suppliers to meet U.S. demand. U.S. measures to
restrict imports from China would not solve the trade
imbalance matter, and would cause indignation among U.S.
consumers.

The Trade Deficit: Those U.S. Export Controls on High-Tech
Goods



14. (SBU) U.S. export controls are another cause of the
U.S. trade deficit. U.S. export controls are the biggest
uncertainties facing Chinese efforts to expand high-tech
imports from the United States. While the ratio of high-tech
imports in China,s imports from the rest of the world are
growing, as are the absolute volumes of high-tech imports,
the ratio of high-tech imports from the United States to
total imports from the United States is decreasing. In 2005,
China,s imported more than $200 billion of high-tech goods
from all countries, but the United States supplied only 8.1
percent of those goods. That was 8 percent lower than in


2001. While the United States had been the second largest
source of Chinese high-tech imports in 2001, the United
States had slipped to sixth place in 2005. The increase in
value of U.S. high-tech exports to China has been far less
than growth rates achieved by the European Union, Japan and
South Korea. The United States is the largest developed
country in the world. In the structure of international
trade, high technology is where the United States is most
competitive. China is a WTO member and its economy is open
to the world. China,s imports from all countries amounted
to $600 billion in 2005, and China does not discriminate when
importing. The Vice Premier expressed surprise that the
United States is being left behind by the European Union,
Japan and South Korea with respect to high-tech exports to
China. She urged the United States to look internally for
causes and solutions.

The Trade Imbalance: Important Issue for Chinese Leaders, Too



15. (SBU) China attaches great importance to the trade
imbalance. President Hu Jintao and Premier Wen Jiabao have
indicated to President Bush in earlier meetings their hopes
to increase Chinese imports from the United States. Premier
Wen made a three-point proposal to President Bush on this
very matter. The Chinese people are a people that keep their
word. China has taken important measures to promote trade
with the United States, and those measures are now beginning
to pay off.

USTR Testimony: China Is America,s Fastest Growing Export
Market



16. (SBU) Wu Yi cited USTR,s February 15 testimony to a
House of Representatives Committee. In 2005, U.S. exports to
China had increased 20 percent, marking the third year in a
row that U.S. exports to China had increased 20 percent or
more. USTR also said that exports to China had increased 118
percent since 2001, the year in which China had acceded to
the World Trade Organization. China is the fastest growing
export market for the United States, and is now the fourth
largest export market for the American goods and services.

Imminent Chinese Trade and Investment Missions to the United
States



17. (SBU) China plans to promote trade and investment with
the United States in 2006. Chinese businesses and
entrepreneurs are being encouraged to travel to the United
States to look for business cooperation opportunities.
During her upcoming trip to the United States for the April
11 meeting of the Joint Commission on Commerce and Trade, Wu
Yi said, she will be responsible for business delegations
amounting to 150 Chinese entrepreneurs. The delegation
members will sign contracts and cooperation agreements as
they look for trade opportunities, consider U.S. products and
pursue investment opportunities. Business delegations will
visit locations in California, Tennessee, South Carolina,
Minnesota, New York, Georgia, Illinois, Washington State and
Washington, DC. Particular interests of the delegations will
include soybeans, cotton, computer software, aircraft,
automotive parts and machinery. According to China,s trade
promotion plans for 2006, 90 functions to promote Sino-U.S.
trade will be conducted, with more than 30 of them scheduled
for locations in the United States. These events will help
U.S. small and medium-sized enterprises to learn about
opportunities in the China market. China is sincere in
making great efforts to promote imports from the United
States.



18. (SBU) The United States should express its sincerity by
undertaking measures to settle the trade imbalance, the Vice
Premier said. Unilateral Chinese measures will not be enough
to resolve the trade imbalance. The United States should
ease export controls that affect shipments to China and ease
restrictions on visas for Chinese entrepreneurs wishing to
travel to the United States to purchase goods.

IPR: I Am in Charge; Increased Enforcement Efforts



19. (SBU) The Vice Premier said IPR protection was another
concern for the CODEL. IPR protection is also an issue for
the Chinese Government. Protection of intellectual property
and the interests of IP rights owners is important not only
in the international arena but is also closely related to
improvement of China,s socialist market economy and China,s
own economic development. China and the United States have
closely related interests with respect to IPR. Over the last
twenty-some years, China has implemented a nearly complete
legal system to protect IPR and has acceded to many
international agreements relating to IPR. Domestically,
China has implemented administrative and judicial measures to
protect IPR.



20. (SBU) The State Council formed a Working Group on IPR
Protection, which the Vice Premier leads. The Working
Group,s mission is to enhance the leadership and
coordination of the Central Government in protecting IPR in
China. As leader of the Working Group, Wu Yi regularly meets
with business representatives in China to discuss IPR
concerns.



21. (SBU) Chinese law enforcement agencies have taken a
series of important and effective measures to protect IPR.
Criminal penalties for IPR violations have been strengthened.
At the end of 2004, the Supreme People,s Court and the
Supreme People,s Procuratorate issued a Judicial
Interpretation that has been implemented. The Judicial
Interpretation lowered the threshold for criminal punishment
of IPR violations. In 2005, the applicability of the
Judicial Interpretation was expanded to include violations
involving audio-visual products. The Ministry of Public
Security and administrative enforcement organizations have
set up effective mechanisms to fight IPR violations. Several
special enforcement campaigns have been conducted to
specially target trademark and copyright protection concerns.
By the end of 2005, all Chinese Government agencies were
using authentic copyrighted computer software.



22. (SBU) At the sixteenth JCCT meeting (July 2005), China
and the United States agreed to enhance cooperation on
cracking down on IPR violations. Four mechanisms were
agreed. The Chinese Government attaches great importance to
education and training on IPR protection. For example,
Beijing had convened Vice Governors from all the provinces
for a dedicated two-week course on IPR issues. Many other
IPR publicity campaigns have been conducted in China. Public
education on IPR matters include a national IPR week around
World Intellectual Property Day (April 26). IPR subjects
have been incorporated into Chinese educational curricula.
In 2006, China will implement stronger IPR enforcement
efforts. Legislation and regulations will be enacted.
International cooperation on IPR matters will also be
strengthened.

IPR: Historic First National IPR Action Plan



23. (SBU) China has just weeks ago published its first-ever
national IPR Action Plan. Too long to summarize in this
brief exchange with the Senators, the Vice Premier presented
translated documents about the Action Plan to her visitors.

Specialized IPR Tribunals Coming



24. (SBU) The Supreme People,s Court has informed courts
at all levels to establish special IPR tribunals to try IPR
violators. This will enhance judicial organs, abilities to
crack down on IPR violations.



25. (SBU) Within the next three years, China will establish
50 IPR information centers in 50 cities throughout the
country to take complaints about IPR protection matters. As
promised at last year,s JCCT meeting, China has begun to
place IPR officials in diplomatic missions overseas. The
first Chinese IPR Ombudsman has joined the Chinese Embassy in
Washington. His job is to enhance communications with the
U.S. business community, especially small and medium-sized
enterprises, and inform them about how to protect their IPR
in China.

WIPO Internet Treaties



26. (SBU) The relevant departments have stepped up their
efforts to prepare the legislative package required for
approval of Chinese accession to the WIPO Internet Treaties
by the National People,s Congress.



27. (SBU) The Ministry of Commerce and other departments
are working closely to protect IPR at trade fairs in China
under a special campaign known as the Azure Sky program.

More IPR Enforcement Data Imminent!



28. (SBU) By the end of March, the Ministry of Public
Security and National Copyright Administration of China will
publish their achievements in recent specialized campaigns
against IPR violators in China. Law enforcement transparency
will be enhanced in the coming year. The Central Government
is encouraging purchase of authentic software by Chinese
enterprises and individuals. Civil law enforcement of IPR
matters will also be enhanced in the coming year.

At April JCCT, Wu Yi Announcements on IPR



29. (SBU) The Vice Premier said at the seventeenth JCCT
meeting on April 11, she will personally introduce the
measures to improve IPR protection and enforcement that China
has taken or is taking. It is only fair to say that the
Chinese Government,s attitude on IPR protection is very
firm. Anyone can see China,s increased efforts to protect
IPR.
RANDT