MOFCOM OFFICIAL ON EXPORT CONTROLS, MARKET ECONOMY STATUS,

UNCLAS SECTION 01 OF 02 BEIJING 000364

SENSITIVE
SIPDIS

STATE PASS USTR

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD CH

SUBJECT: MOFCOM OFFICIAL ON EXPORT CONTROLS, MARKET ECONOMY STATUS,
INDIGENOUS INNOVATION, CFIUS

This cable is Sensitive but Unclassified (SBU) and for official use
only. Not for transmission outside USG channels.


1. (SBU) SUMMARY: China is seeking "equal treatment" by the United
States at the Strategic and Economic Dialogue (S&ED) and Joint
Commission on Commerce and Trade (JCCT),Ministry of Commerce
(MOFCOM) Department of American and Oceania Affairs Director General
He Ning told an interagency team of Treasury, State, Commerce and
USTR officials in a January 25 meeting. He highlighted Chinese
concerns about U.S. export controls on high-tech goods to China and
U.S. refusal to grant market economy status to the PRC, commenting
that the S&ED and JCCT both offered useful mechanisms for addressing
these issues. He argued that China's indigenous innovation policies
were not intended to shut the door to foreign investment and would
not run counter to WTO rules. DG He also criticized a recent CFIUS
decision involving First Gold, rejected U.S. calls for RMB
appreciation, and expressed skepticism that American consumers would
not "return to their old ways." END SUMMARY.

S&ED and JCCT: China Seeking "Equal Treatment"
-------------- --


2. (SBU) DG He stressed that China wanted to be treated equally,
citing the issues of U.S. export controls and China's market economy
status as two particular issues of concern for China. He said that
the JCCT and S&ED were both effective mechanisms for "improving the
trade and investment environment" and for addressing the issues of
export controls and market economy status "from different angles."
The JCCT offered a useful mechanism for more detailed, technical
discussions of these issues, while the S&ED provided an appropriate
forum for more long-term, general and strategic discussions. He
commented that treating each other equally in dealing with
differences would result in fewer people in both countries
advocating for more restrictions on trade and investment.

Export Controls
--------------


3. (SBU) DG He said that U.S. restrictions on the export of
high-tech goods to China made the trade imbalance "more serious" and
raised Chinese concerns about unequal treatment by the United
States. Treasury Department Senior Coordinator for China Affairs
David Loevinger responded that, while the issue of export controls
was generally discussed by U.S. and Chinese economic agencies, the
underlying issue was national security and nonproliferation
concerns. Noting that the military and other forces had a
significant influence on the issue but had not usually been part of
the dialogue with the Chinese economic ministries, Loevinger said
that the S&ED could be an opportunity to bring these agencies into
the discussion. Assistant USTR Tim Stratford commented that the
United States would need to have internal discussions and consult
with the Department of Defense before formally proposing that the
military or other agencies take part in discussions with the Chinese
about export controls. DG He responded that China was open to
discussing "any constructive proposal."

Market Economy Status
--------------


4. (SBU) DG He said that China had raised the issue of market
economy status at the last round of JCCT talks but "did not see much
movement" on the issue. He complained that U.S. refusal to grant
market economy status resulted in discrimination against China
because it faced less favorable procedures for anti-dumping cases.
According to He, China was not necessarily opposed to U.S.
countervailing duties and anti-dumping measures but was concerned
that the United States was not treating China equally in adopting
such measures.

Indigenous Innovation and Services Sector
--------------


5. (SBU) Loevinger said that the United States was interested in
using the S&ED Economic Track to discuss trade and investment
issues, including indigenous innovation and Chinese efforts to
promote the development of its services sector. He expressed U.S.
interest in better understanding China's indigenous innovation
policies, commenting that the United States shared China's desire to
promote R&D and used government policies and incentives to promote
R&D. While noting that a small number of such policies treated
foreign companies differently than U.S. companies, Loevinger
stressed that foreign investors could take advantage of most U.S.
policies to promote R&D. He also urged the further development of
China's labor-intensive, job-creating services sector as an
important component of rebalancing.


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6. (SBU) DG He indicated that the Ministry of Science and Technology
(MOST) did not intend for its indigenous innovation policies to shut
the door to foreign investment. He said that MOST understood WTO
principles and did not want its policies to run counter to WTO
rules. Regarding China's services sector, DG He said that MOFCOM
supported the development of the services sector but played a
limited role on the issue because other agencies took the lead in
overseeing China's service industries.

Chinese Investment in the United States
--------------


7. (SBU) DG He emphasized the importance of transparency and
fairness for Chinese investments in the United States, including on
cases that fall under Committee on Foreign Investment in the United
States (CFIUS) review. Raising the recent First Gold case, he
asserted that the opaque and "random" reasoning for rejecting the
investment had sent a bad signal to Chinese investors, who feel
discriminated against. Loevinger responded that only a very small
fraction of Chinese investments in the United States come under
CFIUS review and most are approved. In the case of the few rejected
cases, national security concerns typically preclude a detailed
explanation of the rationale behind the determination.


8. (SBU) Loevinger raised the prospect of using the next S&ED to
highlight mutually beneficial Chinese investments in the U.S. to
increase awareness of the value of the economic relationship on both
sides. He Ning stated that this idea was worth considering, but
that any U.S. presentation along these lines would have to be
"credible and convincing," otherwise it would likely appear
disingenuous to the Chinese.

Consumption in the United States
--------------


9. (SBU) In response to hearing Loevinger describe the depressed
consumption situation in the United States for the foreseeable
future and the unlikelihood of the U.S. being able to drive future
Chinese economic growth, He Ning expressed skepticism that U.S.
consumers would not "go back to their old ways." Loevinger
concluded the meeting by sharing a graph that demonstrated rising
U.S. savings and falling net worth.

HUNTSMAN