Identifier
Created
Classification
Origin
07BEIJING264
2007-01-11 13:12:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Beijing
Cable title:  

SED SESSION FOUR: PROMOTING TRADE AND INVESTMENT

Tags:  ECON EFIN ETRD PREL CVIS SENV ENRG CH 
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VZCZCXRO5573
OO RUEHCN RUEHGH RUEHVC
DE RUEHBJ #0264/01 0111312
ZNY EEEEE ZZH
O 111312Z JAN 07
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3731
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCPDOC/USDOC WASHDC IMMEDIATE
RUEHC/DEPT OF LABOR WASHDC IMMEDIATE
RHMFISS/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
RUEAUSA/DEPT OF HHS WASHINGTON DC IMMEDIATE
RUEAEPA/HQ EPA WASHDC IMMEDIATE
RHEHNSC/NSC WASHDC IMMEDIATE
INFO RUEHOO/CHINA POSTS COLLECTIVE
UNCLAS E F T O SECTION 01 OF 05 BEIJING 000264 

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SENSITIVE
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STATE ALSO FOR OES/WATSON AND DEROSA-JOYNT
STATE PASS CEQ CONNAUGHTON
STATE PASS CEA FOR BLOCK, SLAUGHTER
STATE PASS USTR FOR STRATFORD, ALTBACH, WINTERS, CELICO
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN
FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRM FOR DAGES
NSC FOR RHUNTER/JSCHRIER/KTONG
TREASURY FOR OASIA/INA DOHNER/HAARSAGER/BAKER/CUSHMAN
TREASURY FOR TAIYA SMITH
DOE FOR INTERNATIONAL/PUMPHREY AND GEBERT
EPA FOR INTERNATIONAL/AYRES, FIDLER, MCASKILL
HHS FOR STEIGER, ELVANDER AND BHAT
LABOR FOR ILAB

E.O. 12958: N/A
TAGS: ECON EFIN ETRD PREL CVIS SENV ENRG CH
SUBJECT: SED SESSION FOUR: PROMOTING TRADE AND INVESTMENT
AND REMOVING BARRIERS

REF: A. BEIJING 259


B. BEIJING 262

C. BEIJING 263

UNCLAS E F T O SECTION 01 OF 05 BEIJING 000264

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SENSITIVE
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STATE ALSO FOR OES/WATSON AND DEROSA-JOYNT
STATE PASS CEQ CONNAUGHTON
STATE PASS CEA FOR BLOCK, SLAUGHTER
STATE PASS USTR FOR STRATFORD, ALTBACH, WINTERS, CELICO
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN
FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRM FOR DAGES
NSC FOR RHUNTER/JSCHRIER/KTONG
TREASURY FOR OASIA/INA DOHNER/HAARSAGER/BAKER/CUSHMAN
TREASURY FOR TAIYA SMITH
DOE FOR INTERNATIONAL/PUMPHREY AND GEBERT
EPA FOR INTERNATIONAL/AYRES, FIDLER, MCASKILL
HHS FOR STEIGER, ELVANDER AND BHAT
LABOR FOR ILAB

E.O. 12958: N/A
TAGS: ECON EFIN ETRD PREL CVIS SENV ENRG CH
SUBJECT: SED SESSION FOUR: PROMOTING TRADE AND INVESTMENT
AND REMOVING BARRIERS

REF: A. BEIJING 259


B. BEIJING 262

C. BEIJING 263


1. (SBU) Summary: In the December 14 Strategic Economic
Dialogue (SED) session on promoting trade and investment,
Secretary of Commerce Carlos Gutierrez described the mutual

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benefits of United States-China trade, urged China to open
further its services market, and underscored the need to
avoid protectionism. Commerce Minister Bo Xilai challenged
United States concerns about the trade deficit, market access
and IPR protection and raised Chinese concerns about USG
restrictions on technology exports and designation of China
as a non-market economy (NME). United States Trade
Representative (USTR) Ambassador Schwab emphasized the
importance of regulatory transparency. People's Bank of
China Governor Zhou explained Chinese steps to open its
financial sector, attributing remaining restrictions to its
desire to maintain financial stability. Senior Vice Foreign
Minister Yang Jiechi advocated liberalizing United States'
visa procedures to promote tourism and business exchanges.
Secretary of Treasury Henry Paulson emphasized the importance

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of opening the Chinese market to foreign investment. End
Summary.

WU YI: ADVOCATING MUTUAL UNDERSTANDING AND COOPERATION
--------------


2. (SBU) Vice Premier Wu Yi started the fourth session of the
Strategic Economic Dialogue (SED) by recommending dealing
with inevitable trade frictions by engaging in a dialogue
from a long-term, non-political perspective, and increasing
mutual understanding and cooperation.

SECRETARY GUTIERREZ: U.S. SERVICE EXPORTS TO CHINA SHOULD

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RISE
--------------


3. (SBU) Commerce Secretary Carlos Gutierrez said we must
improve the composition of United States exports to China by
dramatically increasing exports of services, noting that we
will not narrow the trade deficit until we have done so. He
urged China to further open its services markets to foreign
participation.



4. (SBU) The trend toward protectionism in both countries
must be avoided, Secretary Gutierrez declared. To do so,
China needs to become more of a market economy through
enlarging the private sector, increasing transparency and
strengthening IPR enforcement. Currently, 75 percent of
IPR-related seizures by United States Customs originate from
China and Hong Kong. To enhance our mutual understanding, we
should discuss the visa reciprocity issue with a view to
increasing travel of our citizens between our countries. The
United States also wants to re-open discussions on civil
aviation to increase flights to and from China.

MINISTER BO: PAINTING A ROSY PICTURE OF TRADE RELATIONS
--------------


5. (SBU) Commerce Minister Bo Xiai predicted that China
would surpass Japan as the United States' most important
trading partner in Asia in the next year or two and
speculated that in ten years' time, we may become each
other's largest trading partner.


6. (SBU) Minister Bo challenged three United States concerns
about its trade with China. First, while acknowledging that
the United States trade deficit is large and growing, Bo

BEIJING 00000264 002 OF 005


asserted that, taking into account lower costs for United
States consumers and the profits of United States companies
in China, both sides benefit equally. The deficit itself is
caused mainly by a shift in the assembly of goods from Japan,
South Korea and Taiwan to China, he argued. Second, China
has made great efforts to protect intellectual property
rights (IPR),but needs more time as its legal and public
education systems lag behind those of more developed
economies. China will continue to increase IPR protections
in order to protect its own industries, not just to respond
to foreign criticisms. Third, China had fully met, and even
exceeded, its WTO accession commitments. Bo noted that
United States exports to China have increased dramatically,
nearly 28 percent annually, since China's WTO accession in
December 2001.


7. (SBU) Minister Bo urged the United States to lift controls
on high-technology exports and to rescind China's designation
as a non-market economy. According to Bo, over the past five
years, the share of United States high-tech products as a
percentage of overall Chinese high-tech imports declined from
eighteen to eight percent. Bo encouraged the United States
to rescind China's NME designation and expressed concern at
the United States Commerce Department's acceptance of a
countervailing duty petition. Noting that the United States'
six criteria for market economy status are not based on WTO
rules, Minister Bo said China would not change merely to meet
Washington's "subjective" standards.

BENEFITS OF INCREASED TRADE, INVESTMENT, TRANSPARENCY
--------------


8. (SBU) USTR Ambassador Susan Schwab emphasized the
importance of transparency to bilateral trade and China's own
development. The SED is well suited to tackle trade and
investment issues, because many of these problems lie outside
the traditional jurisdictions of China's Ministry of Commerce
and USTR/USDOC. Deliverables are also important for
propelling the dialogue, she underscored. Many United States
companies are concerned about the lack of transparency in
China's reforms of its postal service, as well as China's
apparent intention to give China Post a monopoly, Ambassador
Schwab said. She warned of the pitfalls of attempting to
pick winners and control competition. The United States'
experience with postal reforms proves the value of
transparency and competition. United States regulatory
changes allowed competition in the express package service
sector, which created a new global market and at the same
time resulted in a more competitive United States Postal
Service. Ambassador Schwab emphasized that that the Doha
Round provides an opportunity for China and the United States
to show leadership in the world economy, noting that no two
countries have more at stake in the world trading system.


9. (SBU) Matthew Slaughter of the Council of Economic
Advisers stressed the benefits of increased trade and
investment, especially in services. Slaughter noted that
companies engaged in international trade tend to be the most
productive and best paying companies. Today, five percent of
the American workforce is employed by foreign companies, but
these companies account for 11 percent of GDP and 15 percent
of private sector research and development.

CHINA'S EFFORTS IN FINANCIAL SECTOR, TECHNICAL STANDARDS
--------------


10. (SBU) People's Bank of China (PBOC) Governor Zhou
Xiaochuan explained steps China has taken to open its
financial sector, while attributing remaining restrictions to

BEIJING 00000264 003 OF 005


the cautious approach adopted following the 1997-98 Asian
financial crisis. China has fully lived up to its WTO
commitments. China has lifted many restrictions on both
incoming and outgoing foreign direct and portfolio
investment. Nevertheless, negotiations on China's WTO
accession took place in the shadow of the Asian financial
crisis. Given the weak state of Chinese banks and capital
markets at the time, China's financial sector was not opened
that widely to foreigners. This is a legacy we are still
dealing with today, Zhou explained.


11. (SBU) Administrator of the General Administration of
Quality Supervision, Inspection and Quarantine (AQSIQ) Li
Changjiang outlined steps China has taken to harmonize and
increase the transparency of its technical standards. Li
also advocated increased exchange of information on
standards, asserting that Chinese companies have suffered USD
22 billion in losses since 2001 as a result of technical
barriers to trade. Currently, 46 percent of China's
standards conform to international norms; the goal is to
raise that figure to 85 percent in 2010, Minister Li stated.

VISAS, PEOPLE-TO-PEOPLE EXCHANGES
--------------


12. (SBU) Senior Vice Foreign Minister Yang Jiechi advocated
changes to United States visa procedures to promote tourism
and business travel. China provides many "conveniences" to
American visa applicants and has a high issuance rate, but
the United States' visa refusal rate is quite high and its
visa procedures complicated and time-consuming, Yang claimed.
As a result, many Chinese businessmen travel to Japan and
Europe instead of the United States and many Chinese students
opt to study instead in the United Kingdom, Australia and New
Zealand. Out of the 31 million Chinese who traveled overseas
in 2005, less than two percent traveled to the United States,
Yang stated. He made three specific proposals: 1) eliminate
the visa interview requirement for government officials at
the Vice Minister-level and above; 2) further open up the
American tourist market to Chinese visitors; and 3) reduce
the amount of time required for security checks for visa
applicants in science and technology fields.


13. (SBU) In response, Assistant Secretary of Transportation
Andrew Steinberg explained steps the United States has taken
to streamline the visa process, such as instituting internet
visa applications and electronic clearances and appointments
for tour groups. There has been a 33 percent increase in the
number of Chinese visitors to the United States, he stated.
A/S Steinberg highlighted that developing bilateral air
services would reduce the bilateral trade imbalance by
increasing exports of United States services (particularly
tourism). Further liberalization in air services would also
spur development of the air cargo industry.

MOFCOM MINISTER BO TAKES ISSUE WITH USG POSITIONS
--------------


14. (SBU) Commerce Minister Bo Xilai's lengthy rebuttal to
the United States statements included the following points:

-- China is willing to work with the United States to
increase trade in services, but China's service sector is
already largely open. At the end of 2005, there were more
than 270,000 foreign invested enterprises in China. The
United States is strong in the services sector, with a USD
2.5 billion bilateral surplus in services trade, but China
still needs time to develop its services sector.


BEIJING 00000264 004 OF 005


-- China has "scrupulously" implemented its WTO transparency
commitments. He complained that, on barriers to agricultural
trade and "national security" barriers to foreign investment,
the United States is not transparent.

-- Secretary Gutierrez's figures regarding the percentage of
United States Customs IPR-related seizures originating in
China and Hong Kong exaggerate their economic impact. While
the numbers are high, their value is low. According to 2005
United Sates Customs figures, only USD 64 million worth of
products was seized, out of a total of USD 163 billion
Chinese exports to the United States.

-- The market is not a panacea. "Market failures" occur in
areas such as IPR enforcement, worker safety, environmental
protection and production capacity. Regarding China's steel
industry, production thresholds are important both for
environmental protection and prevention of excess capacity.

-- United States criticizes merger and acquisition obstacles
in China, yet the Lenovo and CNOOC acquisition cases
triggered "national security" concerns in the United States.

-- Because China has not been granted &Market Economy
Status8 in the United States, Chinese companies are required
to pay a higher duty in dumping cases, which is
discriminatory. Subjecting Chinese companies to
counter-vailing duties would be a "double penalty." The
United States should use international standards in
determining whether or not China is a market economy.

RESPONSES FROM SECRETARIES GUTIERREZ AND PAULSON
-------------- --------------


15. (SBU) Secretary Gutierrez stated that the United States
is ready to discuss United States high-tech export controls
but noted that Congressional approval would be required for
any changes. On IPR seizures, Secretary Gutierrez said he is
prepared to compare figures. The Secretary welcomed Bo's
statement that China is willing to expand service imports.
Turning to the acceptance of a petition for countervailing
duties, Secretary Gutierrez asserted that the USG process is
transparent and that we will communicate with the Chinese
side so as to avoid any surprises. Secretary Gutierrez also
said he was willing to discuss further the Market Economy
Status issue.


16. (SBU) Treasury Secretary Paulson responded by emphasizing
the importance of opening the Chinese energy market,
including Chinese energy companies, to foreign investment.
Secetary Paulson reminded Bo that the Lenovo deal as
approved and has been successful. The CNOOC experience in
its attempted acquisition of Unocal, in contrast, was highly
unusual. It was a contested deal, in which Chevron had
already signed a contract, so it was to be expected that the
case would be politically sensitive. China cannot claim it
is open to services if foreign firms can only make small
minority investments in Chinese companies, Secretary Paulson
stated. Advocating the removal of investment caps, the
Secretary said he does not know of a single joint-venture

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bank that has been globally competitive. Opening China to
investment and services would not only help the trade deficit
but would also help the entire Chinese economy to grow,
Secretary Paulson emphasized.

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PARTICIPANTS
--------------


17. (SBU) Participants in SED Session IV:

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United States Delegation

--Henry Paulson, Secretary of Treasury
--Clark Randt, Jr., United States Ambassador to China
--Michael Leavitt, Secretary of Health and Human Services
--Samuel Bodman, Secretary of Energy
--Carlos Gutierrez, Secretary of Commerce
--Elaine Chao, Secretary of Labor
--Susan Schwab, United States Trade Representative
--Stephen Johnson, Administrator of the Environmental
Protection Agency
--Benjamin Bernanke, Chairman of the Federal Reserve
--James Lambright, Chairman and President of Ex-Im Bank
--Daniel Sullivan, Assistant Secretary, Department of State
--Andrew Steinberg, Assistant Secretary, Department of
Transportation
--Matthew Slaughter, Member of the Council of Economic
Advisors

Chinese Delegation

--Wu Yi, Vice Premier
--Jin Renqing, Minister of Finance
--Ma Kai, Chairman of National Development and Reform
Commission
--Xu Guanhua, Minister of Science and Technology
--Tian Chengping, Minister of Labor and Social Security
--Liu Zhijun, Minister of Railways
--Li Shenglin, Minister of Communications
--Wang Xudong, Minister of Information and Industry
--Bo Xilai, Minister of Commerce
--Gao Qiang, Minster of Health
--Zhou Xiaochuan, Governor of People's Bank of China
--Li Changjiang, Administrator of General Administration of
Quality Supervision, Inspection, and Quarantine
--Zhou Shengxian, Administrator of State Environmental
Protection Administration
--Zhou Wenxhong, Chinese Ambassador to the United States
--Xu Shaoshi, Deputy Secretary-General, State Council
--Yang Jiechi, Vice Minister, Ministry of Foreign Affairs
--Zhang Xiaoqiang, Vice Chairman, National Development and
Reform Commission
--Li Yong, Vice Minister, Ministry of Finance
--Yi Xiaozhun, Vice Minister, Ministry of Commerce
--Hu Xiaolian, Vice Governor, People's Bank of China
--Li Ruogu, Chairman of China Export-Import Bank
SEDNEY

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