EAP/DAS KEITH'S MEETING WITH METI OFFICIALS ON PRC

C O N F I D E N T I A L SECTION 01 OF 04 TOKYO 002333 SIPDIS SIPDIS DEPARTMENT PASS USTR FOR AUSTRS STRATFORD AND CUTLER USTR ALSO FOR BEEMAN, NEUFFER PARIS FOR USOECD GENEVA PASS USTR TREASURY FOR INTERNATIONAL AFFAIRS - DOHNER, TRAN, GREWE E.O. 12958: DECL: 04/28/2016 TAGS: ECON ETRD EFIN ENRG APECO PREL CH JA SUBJECT: EAP/DAS KEITH'S MEETING WITH METI OFFICIALS ON PRC PRESIDENT HU JINTAO'S U.S. VISIT TOKYO 00002333 001.2 OF 004 Classified By: Joe Donovan, Charge d'Affaires, a.i. Reason: 1.4 (b,d). ¶1. (C) Summary: Questions from officials of Japan's Ministry of Economy, Trade, and Industry (METI) focused on China's promises regarding exchange rate reform and intellectual property protection during an April 26 briefing on Chinese President Hu Jintao's recent U.S. visit by EAP Deputy Assistant Secretary James Keith. The METI officials also urged serious U.S. consideration of a Chinese proposal for a high-level regional meeting of leading energy consuming countries -- an arrangement they felt would be more effective than the current APEC framework of discussions on strategic energy issues. End summary. ¶2. (SBU) Participants: METI Eiichi Hasegawa, Deputy Director General, Trade Policy Bureau Shigeaki Tanaka, Director, Northeast Asia Division, Trade Policy Bureau Keisuke Saito, Director, Industrial Revitalization Division, Industrial Policy Bureau Tetsuya Watanabe, Special Assistant to the Director General Ken Watanabe, Director for International Energy Strategy, Agency for Natural Resources and Energy Tomohiro Kaneko, Deputy Director, Americas Division, Trade Policy Bureau U.S. Deputy Assistant Secretary James Keith Economic Counselor Daniel Fantozzi First Secretary Steven Hill First Secretary Christopher Wurzel Economic Assistant Ritsu Yamashiro ¶3. (C) DAS Keith opened with an overview of the visit to the United States by Chinese President Hu Jintao. He stressed that the visit had taken place in a highly politicized environment in both the United States and China and that economic and trade issues had figured prominently among U.S. concerns. The Chinese, Keith acknowledged, had chafed at U.S. pressure on a number of economic issues but had shown noticeably greater sophistication and understanding than in the past in how they sought to engage the U.S. side in management of domestic political dynamics regarding the relationship with China. Keith also emphasized that China's Eleventh Five-year Plan had laid out a series of important and measurable economic commitments and that, most importantly, the Chinese people would be able gauge the leadership's success in economic reform and development. He noted that People's Bank of China Governor Zhou Xiaochuan had made great progress in convincing Senators Schumer and Graham that China was serious about long-term reform of its exchange rate regime during their visit to China earlier in the year. The reiteration of this commitment by President Hu and other statements by Hu confirming China's determination to address issues such as intellectual property rights protection to some extent had mitigated criticism in the United States of China on economic issues and led to a refocusing by some on non-economic differences such as regional security and human rights. -------------- Why Not A State Visit? -------------- TOKYO 00002333 002.2 OF 004 ¶4. (C) Trade Policy Deputy Director General Hasegawa's first question following DAS Keith's briefing centered on the reasons behind the decision not to accord the Chinese President a full state visit. DAS Keith noted that this question had figured prominently during the preparations in 2005 when Hu's visit had originally been scheduled for the fall of that year. Keith recalled President Bush's preference for a more substantive, informal exchange with the Chinese leader in which more time could be devoted to discussion and to establishing a personal rapport. The Chinese had insisted on a ceremonial state visit. Subsequently, the Chinese had come to accept that pressing their desire for a state visit further would not be beneficial, just as the U.S. Administration had acknowledged Hu's political need for a formal reception. -------------- Exchange Rate Reform -------------- ¶5. (C) Hasegawa then asked what elements of China's plan for financial reform had been most convincing to members of Congress to the extent that they backed away from their proposed legislation that would impose tariffs on Chinese goods in retaliation for alleged currency manipulation. Keith stressed that People's Bank of China Governor Zhou had persuaded Senators Schumer and Graham that China, through the five-point plan presented by Zhou, was committed to structural reforms that would move China toward a market-driven exchange rate mechanism. Although there is an acknowledgement in Congress and the Administration that changes to the exchange rate regime were not the only test of China's efforts to address its huge trade imbalances, the exchange rate issue had taken on symbolic significance with respect to Chinese commitment to address those imbalances, Keith added. ¶6. (C) Hasegawa expressed a "personal view" that China would need to liberalize its exchange rate regime eventually simply because of the interest rate costs involved in maintaining such large foreign currency reserves. That said, Hasegawa noted, even a limited appreciation in the value of the Chinese currency would entail a tremendous shift in China's global purchasing power. With the equivalent of about USD 4.0 trillion in Chinese currency held in China's domestic banking system, a ten percent appreciation of the currency would raise China's purchasing power by USD 400 billion -- a sum, Hasegawa said, equivalent to the total assets of the Toyota Motor Corporation. Hasegawa indicated that, because of this consideration, he advised Japanese businesses to analyze carefully the many implications, both good and bad, of a possible revaluation of the Chinese currency. Hasegawa also asked whether the Treasury Department would determine China had been manipulating its currency in the semi-annual report, which had been due for release on April 15. Keith said he was unsure of what the Treasury Department's determination would be. --- IPR --- ¶7. (C) Turning to the question of intellectual property rights (IPR),Hasegawa noted that China has made progress in strengthening IPR protection but that violations had grown commensurately. The problem, Hasegawa stressed, was not China's legislation itself TOKYO 00002333 003.2 OF 004 -- which he compared favorably with Japan's own -- but with enforcement. He said he was not optimistic that the assurances given by the Chinese President on IPR would be enforced and asked that Japan and the United States continue to cooperate closely in monitoring China's progress in this area. Keith said the United States shared Japanese concerns about the enforcement of IPR protection in China and noted that the United States was still collecting data in the expectation of eventually filing a case against China on IPR at the World Trade Organization. Similarly, the United States had filed its case against China on possible illegal imposition of a domestic content quota on auto parts as a way to demonstrate U.S. determination to use the tools at its disposal to ensure fair access to the Chinese market. Asked by Watanabe (who handles WTO dispute settlement in the METI Trade Policy Bureau) whether the United States had brought the auto parts case for political reasons, DAS Keith stressed that the decision to bring the case had been based on the substance of China's behavior; the timing of submission to the WTO, however, had been politically advantageous. ¶8. (C) As for the Chinese side, Keith added, the fact that the very able Vice Premier Wu Yi had responsibility for IPR was a good sign that China was taking its promise to energize its IPR enforcement apparatus seriously. Hasegawa asked wryly what DAS Keith thought of the quality of China's judiciary. Keith noted that the United States had many exchanges in the area of rule of law with the Chinese, particularly on legal education, but acknowledged readily that China still lacked key elements in its legal system, most notably an independent judiciary. Nevertheless, Keith indicated, the Chinese have realized that the lack of effective legal protection for intellectual property was both hurting their chief advocate in the United States -- American business -- and forming an obstacle to the realization of China's economic development goals. -------------- Energy Dialogue -------------- ¶9. (C) Noting that China had become a bigger energy importer than Japan, Hasegawa recounted that METI Vice Minister Kusaka's initiative to launch a regional dialogue on common economic interests, including energy, over 18 months ago had received a fairly cold response from the United States. Subsequently, a U.S. State Department official toward the end of 2005 had suggested a similar five-country dialogue on energy to include Japan, the United States, China, South Korea, and Russia. The Chinese had then in March this year put forward a proposal for a one-time meeting including the United States and major Asian energy consumers (China, Japan, India, South Korea). Hasegawa found it positive that China included the U.S. and suggested that the United States and Japan should respond favorably to the Chinese proposal but that they should recommend that the meeting not be an isolated event but should be held on a regular basis. He recommended a ministerial-level meeting to launch this process and indicated his view that this type of coordination among these major global energy consumers would send a good message to the marketplace. Hasegawa said his impression of the initial U.S. response to this initiative had been cool. DAS Keith replied that the United States was inclined to respond favorably to the Chinese proposal but stressed that much remained to be determined as to how to realize this type of multilateral exchange. TOKYO 00002333 004.2 OF 004 ¶10. (C) Hasegawa acknowledged that there had been some progress on energy policy coordination through the Energy Ministers' meeting of the Asian Pacific Economic Cooperation forum (APEC). According to Hasegawa, APEC had the disadvantage of including too many participants. In particular, Taiwan was an APEC member, and it was necessary to uphold the principle of its equal participation in APEC events. In addition, although APEC had produced some very comprehensive statements on energy policy, it had no effective mechanism to ensure implementation of those agreed positions. If practical results were to be achieved, Hasegawa stressed, it could only be done in a small group of key countries in East Asia along with India. Energy was too strategic a topic to be effectively discussed in any forum that had more than ten members, Hasegawa said. Keith responded by noting that energy issues were a part of Deputy Secretary Zoellick's bilateral strategic dialogue with the Chinese and that Zoellick would be consulting with China's National Development and Reform Commission, the originator of the Chinese proposal for a regional meeting, during his next trip to China. ¶11. (U) DAS Keith cleared this message. DONOVAN