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U.S.-China Economic Relations—What Will the Next Decade Bring?

A ChinaFile Conversation

On Monday, within hours of the announcement that Chinese President Xi Jinping will meet U.S. President Barack Obama on a visit to California on June 7-8, Tung Chee-hwa, the former Chief Executive and President of the Executive Council of Hong Kong, introduced former U.S. Secretary of State Henry Kissinger as “the original architect of U.S.-China relations” as he heralded the publication of a new report that outlines guidelines for the two leaders' summit.

Shanghai native Tung, 75, speaking in English, drew laughs from the standing-room-only crowd at the Asia Society headquarters in New York, when he said that Kissinger—a German immigrant to the U.S. and a power-player on the world stage even before his secret visits to China in 1971—needed little introduction because "he's the best at everything he tries—except his English.”

Tung said that the report from the China-United States Exchange Foundation, called “U.S.-China Economic Relations in the next Ten Years,” concludes that Beijing and Washington share the desire to “establish a pattern of secure, high-quality sustainable growth and employment for their people.”

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“During the next decade, this important economic relationship has the potential to create enormous economic opportunities and millions of jobs, as well as public good, globally, in areas of energy security and climate change,” Tung said.

Taking the stage, the 89-year-old Kissinger said the relationship between the U.S. and China, now the world's No. 1 and No. 2 largest economies, respectively, has become far bigger than anybody could have imagined when he played a part in its establishment in the middle of the Cold War, at a time when there “was next to no trade between China and the United States.”

“One of the first moves the Nixon Administration made was to permit the purchase of one hundred dollars worth of goods manufactured in China by tourists that visited Hong Kong,” Kissinger said. “That was considered a daring move and an important signal to China.”

Well, the signal seems to have been heard loud and clear and China’s former Vice Minister for Commerce Madame Ma Xiuhong was quick to point out that things are very different today. Speaking on a panel following Kissinger's remarks, Ma pointed out that China, long the holder of a trade surplus with the United States, expects to import $10 trillion in American goods in the next five years, and adding that her country also would take in $2 trillion in U.S. services and continue to grow the number of Chinese tourists traveling to America from the 1.8 million who arrived here in 2012.

Trade, Ma said, is “ballast” that props up the U.S.-China relationship—a relationship otherwise complicated by simmering two-way mistrust over how leaders from each country should handle such issues as North Korea’s nuclear ambitions, global energy security and climate change, human rights and freedom of expression.

Comments

[Editors' note: the following is a transcript of public remarks made from the stage at the Asia Society on Monday]

When many of us came into the the story of U.S.-China relations, the currency of the realm was politics. When Henry [Kissinger] went to China, there was no economics to deal with. So, it was a political question. Without really noticing it, we’ve undergone an extraordinary transmigration from the currency of politics to, really, the currency of currency.

We talked about trade at some length, and indeed, China’s trade relations with the world are extraordinarily robust—some $2 trillion. But I think we’re sitting at the edge of a very interesting change, that’s already starting to happen. Madame Ma [Xiuhong] alluded to it. It’s a shift away from China being the epicenter of trade to being the epicenter of investment. This is going to transform the world.

We’ve lived through varying sorts of tidal flows of foreign direct investment. It used to be that investment just sort of rained down on the United States and Europe as the logical places to go. Then there started to be a great interest in emerging markets, and that’s when many people went off to China and started investing in China.

Now, we’re at this other inflection point, where the investment is starting to flow out of China—part of the “going out” policy—and as companies accumulate capital and move up the value chain, they don’t want to just buy a coal mine or an iron mine. They want a brand, they want to be in manufacturing or information systems, and so we’re beginning to see this change. 
I think America is not ready for it. I think we’ve not really thought about it particularly thoroughly because we never have had to think about getting investment. The truth is now that we both need new sources of investment and China is the most logical, promising place from which more of those capital flows will come.

This is something that is going to have a profound impact on U.S.-China relations. Today, China’s foreign direct investment in the United States is very small—on the same level as New Zealand, Denmark. But in some of the work we’ve done here at the Asia Society, we estimate that there’s a potential of from $1 trillion to $2 trillion that will be trying to exit China. The question is, where is it going to go.

This is an area on which we need to concentrate more, because it actually is a win-win proposition.  You go to China and there's a tremendous amount of uncertainty about whether this investment is welcome. That largely grows out of several cases—the Unocal case, ZTE, Huwei. There is a review process, but you should all know that the only grounds on which the United States can reject foreign investment is national security grounds—extremely narrow. There are very few investments that get turned down. America is one of the most open economies in the world to foreign investment, but that is not always the perception.

If we are talking about marriages between foreign policy, bilateral relationships and economics, this is one which is going to deserve our attention going forward.

We don’t want to have too rosy-eyed a picture.  There’s a lot of history between the U.S. and China.  It has made our relations difficult.  They continue to be difficult at times, despite an understanding of a greater common interest, we sometimes have a difficult time digging down to it. Things get in the way and it is the unpleasant job of governments, of course, to deal with all the problems that are very difficult to solve. Trade and business can sometimes have a more felicitous relationship and I think there's also a role for cultural exchange and other kinds of exchange that are not so fraught with tension.

As I look at the horizon, I’m particularly gratified to hear that President Xi is not only coming to the United States, but he’s not, God bless him, going to Washington. I think that he’s evinced a tremendous wisdom. If he went to Washington, he’d be immediately trapped in arguments over state dinners, 21-gun salutes and all of the protocol issues that essentially go nowhere.
So, where's he going? He’s going to Los Angeles. He’s going to Walter Annenberg’s estate. Nice golf course, tennis courts, swimming pool—no neckties needed. And, hopefully, he and  President Obama will be able to get down to business, to try to dig down to some of these clouding issues to these basic common interests. It doesn't matter what you think, the U.S. and China have to get along, and so we have to get down to that kind of bedrock.

I worry greatly about some of the things percolating around Asia, particularly the island disputes—they cause a good deal of worry. They're very inflammatory. They've sort of replaced Taiwan and the point of tension.

I’m a little more optimistic about our relationship vis-a-vis North Korea. There seems to be some common ground there. There needs to be more military-to-military relations. We have two very different political systems, and I don’t need to tell anyone that that’s a constant source of tension, but tension or not, we need to work through that to get to some of the other issues.

One of the most important points that Orville made on the panel was very brief and easy overlooked. He said that the real key to growing the U.S.-China relationship may not be top-level ties between the national governments in Beijing and Washington, but province-to-state (and, I would add, city-to-city) cooperation. This is true for trade (pitching local goods) but it’s particularly true for outbound Chinese investment, where establishing a comfort zone for often-inexperienced Chinese firms venturing abroad is often critical. The development of stakeholder relationships between communities in the United States and potential investors from China—in other words, the development of practical trust—is essential if we are to maximize the potential for job and growth creation in the United States while avoiding the “same bed, different dreams” dilemma that can lead to bad feeling and missed opportunities.
 
I also would like to second Orville’s point that while we always should be constructive, we shouldn’t paint an unrealistically positive picture of the U.S.-China economic relationship and its potential. A few of the Chinese speakers delivered the message that China’s economic growth is on track, that economic adjustment is well along and taking place smoothly, and that all risks are under control. Perhaps this is a message they feel they must deliver when speaking to a foreign audience. But I hope it is not one that they believe. It certainly is not what Premier Li Keqiang has been saying in recent days, and I have been encouraged to hear the sense of urgency in the Premier’s latest comments on the need for broad and aggressive market reform, and was a little discomfited to hear the absence of such urgency in today’s remarks.