Press Center

 Treasury Secretary Jacob J. Lew Remarks On U.S.-China Economic Relations At the American Enterprise Institute

Secretary Lew’s remarks will be live streamed here.
WASHINGTON – It is a pleasure to be with all of you today to discuss the economic and financial relationship between the United States and China, one of the most consequential bilateral economic relationships in the world.
It is a relationship with many dimensions, where serious differences on issues such as human rights exist alongside the reality of our deep and expanding economic ties and growing cooperation on global challenges such as climate change and disease eradication.  It is also a relationship where opportunities in the economic sphere have long been closely tied to broader political and security considerations.  And it is a relationship that continues to grow in importance as China navigates a challenging economic transition to a more balanced sustainable economy that is rooted in domestic consumption, reductions in excess capacity, and greater openness.
Both the United States and China recognize that the future of our two countries is increasingly interconnected.  For our part, we want China to succeed in its economic transition, because China’s success benefits our own economy as well.  We continue to welcome the emergence of a peaceful, stable, and prosperous China that plays a responsible role in global affairs.    
In my remarks today, I would like to describe the Obama Administration’s approach to the U.S.-China economic relationship, the progress we have made and the key areas that will be central to our relationship moving forward.
Beyond GDP:  Why the U.S.-China Economic Relationship Matters
The United States and China are the two largest economies in the world, accounting for roughly one-third of total global output, and in recent years our countries have been the primary engines of global economic growth. 
Just as China benefits when our economy does well, America benefits as a growing China becomes a larger market for our goods and services.  U.S. exports to China have roughly doubled since early 2009—substantially faster than in any other region of the world.
As the world’s second-largest economy, disruptions in China can have negative consequences for the rest of the world, including here in the United States. Over the past year, China rattled global markets as exchange rate policy changes raised questions about how it would manage the transition to a more sustainable growth rate.
And as China continues to grow, it is more important than ever that U.S. companies have the ability to compete on a level playing field—both within China and globally.  We need to challenge China’s policies that disadvantage our firms and workers, whether they are currency practices, trade barriers, or excess capacity in industrial sectors.
But our relationship is important beyond sheer market size and GDP.  U.S. and Chinese leadership can be a catalyst to drive higher global standards and promote growth, fair trade, global development, and efforts to protect the environment.  When our nations reach agreement, it becomes a magnet for others to join.
Finally, a strong U.S.-China relationship has been integral to increasing the effectiveness of tools like financial sanctions.  Close cooperation was critical in implementing sanctions on Iran and continues to be essential in responding to North Korea’s nuclear provocations. 
Beyond Talking Points:  The Texture of U.S.-China Engagement Today
For this relationship to work, we need effective communication, both to seize opportunities and directly address differences.  The way in which the United States and China engage with one another on financial issues has been transformed over the past decade as we have worked more closely together.
Economic dialogue has been part of the U.S.-China relationship since the 1970s, initially under the rubric of the U.S.-China Joint Economic Committee.  China’s accession to the World Trade Organization marked another critical milestone. 
But these dialogues were largely transactional, with official meetings frequently characterized by formal recitation of talking points.  There was no ready mechanism to develop high level relationships, escalate issues to leaders, and establish priorities for engagement to produce results.
Former Treasury Secretary Hank Paulson changed this with the establishment of the Strategic Economic Dialogue in 2006.  Recognizing the role that economic issues play within the broader bilateral relationship, the Obama Administration expanded the discussions to create the U.S.-China Strategic & Economic Dialogue, or S&ED, adding a foreign affairs track to complement the economic track.  
To ensure the S&ED could achieve concrete results, President Obama and President Xi Jinping designated China’s Vice Premier Wang Yang and myself as “special representatives,” with the responsibility of coordinating and bringing together all relevant agencies within our respective governments to expand economic priorities and narrow differences. 
This important engagement has changed how we view each other and our shared leadership role in the world.  By no means do we agree on all issues, but we continue to build trust by identifying areas of common interest and managing our disagreements.  And increasingly, we continue to find ways to coordinate on important global priorities.
Beyond Communiques:  Achievements With China Under the Obama Administration
Results are the best proof that this process has great value.  Let me start with global priorities.
To cooperate effectively, it is important to begin by acknowledging how much the world has changed over the past half century.  The Obama Administration recognized early that the growing economic weight of major emerging markets makes it essential that they be included in and share responsibility for upholding and leading the global system.  As emerging nations acquire more representation and a larger voice in international institutions, they also assume growing responsibility for living up to existing high standards and a role in strengthening those standards for the future.  This idea is what animated the U.S. push to reform governance at the International Monetary Fund.  At the outset of the Administration, China was still wedded to the notion that advanced economies like the United States held responsibility for most global issues.  But as China has grown and moved increasingly from a recipient to a provider of development assistance, it has become more willing to cooperate and contribute to addressing global challenges. 
On trade issues, we used the S&ED to finalize an agreement to expand the trade of information technology products.  This required regular engagement, often at the highest levels of our respective governments. But together we facilitated agreement among nearly 50 trading partners.  The WTO Information Technology Agreement was the first major tariff-elimination measure in the WTO in 18 years, a critical achievement for the United States as information technology is one of our competitive strengths and every year we export more than $100 billion of Made-in-America technology covered by the agreement. 
On climate change, we agreed on both meaningful goals and a shared perspective on how to achieve them.  We were able to overcome concerns that those who make commitments and take steps to reduce greenhouse gas emissions would be at a disadvantage commercially compared to those who do not, but still benefit from the efforts of others.  The progress we made began in 2013 when President Obama and President Xi reached an earlier agreement on hydrofluorocarbons or HFCs, during their Summit in Sunnylands, California, an agreement reached after preliminary conversations between S&ED special representatives, which helped lay the foundation for success at the 2015 Paris Climate Conference (COP21).
Building on this momentum, we share the goal of bringing the Paris Agreement into force this year, and are working together for strong climate outcomes at the G-20 leaders summit this fall.  The United States and China have also both committed to conclude negotiations this fall on an HFC Amendment to the Montreal Protocol, and a market-based measure to reduce aviation emissions.  We are working closely with China to craft a measure that balances the interests of countries growing at different rates.
And when China proposed a new multilateral development bank—the Asian Infrastructure Investment Bank —many also assumed that the United States would be opposed.  In fact, from the start, our position recognized the need for additional investment in the region, and the important role of multilateral mechanisms in financing it.  It was also our view that new institutions must maintain high standards of governance, environmental and social safeguards, procurement, and debt sustainability.  Today, the AIIB is much more likely to meet these standards as a result of our shared dialogue and our support for co-financing and cooperation with institutions like the World Bank and Asian Development Bank.  When President Obama and President Xi met last September, China affirmed its support for the existing international financial institutions – declaring that new institutions like the AIIB should operate in line with their high standards.  President Xi also pledged to work with the United States to continue to reform and modernize the existing international financial institutions, while also agreeing to meaningfully increase China’s role as a donor in these institutions.
Our close dialogue was also critical in establishing the International Working Group on Export Credits (IWG) in 2012, marking the first time that OECD and non-OECD countries, including China, have committed to negotiate a new set of guidelines to discipline government support of export finance.  These guidelines will level the playing field for U.S. exporters and ensure that government support will complement, rather than crowd-out, commercial export finance. 
We have also made significant progress on bilateral issues in recent years, often in areas that create tension between our two countries.  We have not shied away from confronting sensitive issues that directly affect U.S. economic interests. 
When China issued regulations for information and communications technology (ICT) equipment purchases by the banking sector it raised significant concerns among U.S. banks, tech companies and cyber-policy experts alike.  We pursued these issues aggressively at the S&ED and through the relationships we had forged.  We did the same when U.S. businesses raised concerns about the discriminatory application of a new anti-monopoly law.  In response, China suspended its ICT rules for the banking sector and undertook specific commitments related to the application of its anti-monopoly law.
And, as part of President Xi’s September 2015 state visit to the United States, we secured a commitment from China to limit the scope of its national security review of foreign investments to true national security concerns, preventing an expansion to broader public interest or economic issues.  China also made several other commitments, including a safe harbor for transactions that complete the national security review process, and a commitment not to use information from third parties for the purpose of promoting the commercial interests of competitors. 
While we have made progress, national security reviews remain an area of ongoing concern, and we expect China to implement these commitments and we will remain vigilant in advancing U.S. interests in this respect.
In recent years, China has committed to a variety of steps to open its economy and level the playing field to the American business community, including improved transparency on regulatory measures.  But we continue to raise concerns about the general climate in China for U.S. businesses. When I was in China last week, I told Chinese leaders that I consistently hear from foreign firms and their concerns about new obstacles in China’s laws and practices, and this is a concern China should want to address to attract U.S. investment and business activity. 
China has also made a number of important commitments with regard to intellectual property rights, including, equitable treatment for foreign intellectual property and vigorous investigation and prosecution of trade secret theft, but more work remains.
A high-standard bilateral investment treaty (BIT) would strengthen the climate for American businesses in China, but this remains a work in progress.  During the 2013 S&ED, we reached the understanding that the BIT would cover all phases of investment and all sectors of the Chinese economy, subject to limited, negotiated exceptions. Such an agreement could unlock new opportunities and level the playing field for U.S. firms and investors.   This week in Washington, the U.S. and Chinese negotiating teams are discussing revised negative list proposals. A sufficiently ambitious negative list from China could open a pathway to additional progress before the end of the year.
Not all of our discussions are easy, and we often use our dialogue to confront contentious issues head-on.  It is no secret that cyber-enabled theft of intellectual property has been a point of friction between our countries in recent years.  Our longstanding position is that governments should not engage in cyber-enabled economic espionage for commercial gain. 
We have since established consultation mechanisms to deepen coordination on a range of cyber issues.  They are generating steady progress, but have not resolved all of our challenges in this area.  We are watching very closely to ensure China’s commitments are followed by action, and we will use all tools available to hold violators accountable.
I saved for last one of the most complex issues – the exchange rate.  For a decade, large-scale Chinese foreign currency intervention to prevent the renminbi from appreciating was a major issue in our economic relationship.  As China intervened, it was also building large current account surpluses, more than ten percent of China’s GDP in 2007.
Over and over our message to China was clear:  unbalanced, export-dependent growth through an undervalued exchange rate and growing current account surplus was both unacceptable and unsustainable.  We emphasized that it was a source of significant and growing friction between our two countries, and that it was broadly harmful to a stable and balanced global economy—a message we advanced not only bilaterally, but also through multilateral mechanisms like the G-20 and the IMF.  We also argued forcefully that a shift to a more flexible exchange rate was in China’s own interest as it would help rebalance China’s economy away from the manufacturing-heavy export sector toward services and domestic demand.  The undervalued RMB made imported consumer goods more expensive even as Chinese policymakers sought to promote greater consumption.
This message was not always well-received by the Chinese.  But the issue remained front-and-center in every engagement.
By virtue of this persistent focus, and through a succession of S&ED meetings and our work at the G20, we obtained progressively stronger Chinese commitments to allow more flexibility in the exchange rate, adopt greater transparency regarding its foreign reserve holdings, and limit foreign exchange intervention as part of exchange rate reforms.  China allowed its exchange rate to appreciate—against the dollar and the currencies of its trading partners—and took other policy measures to rebalance growth towards domestic demand.  As a result, China’s current account surplus fell below three percent of GDP.
Last August, China introduced an unexpected exchange rate policy that when poorly communicated caused the renminbi to depreciate and led global markets to sell off sharply.  The global concern reflected a fear that China’s economy has weakened quickly, and that policy makers were responding through an intentional devaluation. 
It was important, even in the dog days of August, to consult quickly and understand what China was really trying to accomplish, and our established relationship facilitated that process.  What I heard from China’s economic leaders was quite different from the prevalent interpretation in global markets.  China’s economic leaders said their move in fact was an effort to move to a more flexible, more market oriented exchange rate, reflecting fluctuations against a global currency basket not just the dollar.  They saw the move as a step toward meeting both U.S. and IMF policy concerns.
These conversations gave me confidence in their intentions and actions.  I believed I could speak publicly in a manner that would calm rather than amplify market concern.  Ongoing channels of dialogue positioned us to provide advice on both policy and communications.  We emphasized to China’s top officials the urgent need to act to stabilize its markets and communicate firmly that China had no intention to engage in competitive devaluation.  I knew that our advice had been heeded when I heard my Chinese interlocutors refer to the “religion of repetition”—the idea of being clear and consistent with message, and a concept I had repeatedly addressed with them.
We have come a long way on exchange rate issues.  Today, rather than intervening in foreign exchange markets to weaken the renminbi, China has used its foreign exchange reserves over the past year to support the renminbi amid fragile global conditions. 
But China still has work to do to achieve the goal of creating the conditions for an orderly transition to a market-determined exchange rate.  At this month’s S&ED, China committed to continue to advance those reforms, allowing for two-way flexibility in the exchange rate.  China must demonstrate in its actions, not just its words, its commitment to that two-way flexibility.  It is one thing for China to allow the RMB to weaken when there are market pressures for it to depreciate.  The real proof of China’s commitment will be in its willingness to allow the RMB to strengthen when appreciation pressures re-emerge. 
Any reversion to the foreign exchange policies and export-led growth model of the past, within the current context of weak global growth, would trigger a new round of tension between our two countries.
Ongoing Priorities for U.S.-China Relations
I believe the future of the economic relationship between China and the United States will largely hinge on three interrelated questions.
First, will China fully implement the ambitious economic reforms that it has announced in a way that decisively embraces the market, leads to greater openness, and produces sustainable growth? 
China’s Third Party Plenum reforms seek to do just that.  They set out a blueprint that, if implemented, would shift China’s economy away from dependence on exports, investment, and heavy industry towards sustainable growth based on domestic household consumption.  The reforms are premised on allowing market forces to shape the dynamics and allocation of resources in China’s economy.  These commitments were recently reaffirmed by the actions of the National People’s Congress to move ahead with reform policies.  China’s success implementing these efforts is of great importance to the global economy, and how China’s leaders balance economic analysis and hard political choices will be key to that success.
Cutting the knot of excess capacity that is distorting global markets illustrates many of the challenges that China continues to face.  As China faces new demographic pressure, with a decline in labor force and a transition to a “new normal” of lower and more sustainable growth, demand for steel and other materials will simply not grow by anywhere near the rates forecast just a few years ago, and may in fact decline.  As China’s investment boom settles back to a more normal level, the country—and the global economy—are saddled with production capacity well in excess of total demand, leading to damaging distortions in international markets.   Significant reductions in excess capacity in China— phasing in modern plants and phasing out old, inefficient, and dirty plants must result in lower not higher capacity.  This adjustment is necessary to bring about efficient use of resources, rebalance the Chinese economy, and eliminate unfair trade.  This will require hard choices, particularly given the Chinese leadership’s long-standing concern for stability, and the employment consequences of reducing production and shutting down plants.
But dealing with excess capacity is not simply a matter of shutting down facilities.  In addition to reducing current capacity, China must also address the factors that fed the construction of excess plants and equipment.  These include subsidized credit, particularly for state-owned enterprises – an inclination to turn to investment whenever growth falters.  China provides strong incentives for provincial and local leaders to build local industrial facilities without taking industry capacity into account.  We have encouraged China to develop a broader basket of fiscal tools, including more demand oriented policies that would support the transition to a more consumer driven economy. At last week’s S&ED, China committed to address many of these market distortions and to progressively reduce excess capacity in the steel sector.  Financial sector reform, the choice of fiscal measures that supports rebalancing, and provincial and local fiscal reforms that tighten budget constraints will be key to solving excess capacity and China’s broader reform agenda.
I believe that China’s economic policy leaders understand what needs to be done and realize that these reforms cannot be delayed indefinitely.  But they need to be prioritized to avoid major economic dislocations and to place China firmly on a path toward sustainable growth.
The second question to be answered is:  will China view foreign business as a partner in advancing its economic development? 
Deng Xiaoping and subsequent generations of China’s leadership recognized the potent role that foreign trade and foreign investment could play in transforming China’s economy.  Recently, however, there is a growing sense among foreign businesses that they may no longer be welcome as new regulations and legal changes appear to specifically disadvantage foreign business.  These concerns are not limited to U.S. businesses.  In a business confidence survey released last week, the European Union Chamber of Commerce in China described a “business environment that is increasingly hostile and a playing field that is perpetually tilted in favor of domestic enterprises” as one reason for a “fresh wave of pessimism” among European companies.   The report said that China has failed to deliver on promises that foreign investors in China will enjoy a more open, competitive market.
We have used the S&ED as a platform to focus high level discussions on addressing big challenges.  But ultimately it will be up to China whether to cultivate a business climate that fosters competition and invites participation by foreign firms.  The willingness of China to engage in serious negotiations on a high-quality U.S.-China Bilateral Investment Treaty will be one important barometer in this regard, as will China’s future actions to address concerns about implementation of its National Security Review.
My final question is:  Will China and the United States be able to collaborate productively on global governance? 
Signs are encouraging that China is ready to shoulder greater responsibility and contribute more resources to address global trade, development, and climate change challenges.  China has the opportunity to build upon the progress in the WTO on the Information Technology Agreement by showing leadership in advancing an Environmental Goods Agreement.  China has indicated that it intends to embed the high standards of the existing international financial institutions into the AIIB, while working to continuously improve those standards.  It is critical that China deliver on that promise.  It is also critical that China be willing to embrace these same high standards of governance and transparency in its own initiatives, such as the “One Belt One Road” and its “South-South Climate Cooperation Fund.”   This will be important in further establishing China’s reputation as a contributor to responsible leadership on the global stage.
The answers to these three questions are highly consequential—for the strength of our two economies and the global economy, for the bilateral economic relationship, and by extension, for the bilateral political and security relationship that is so vitally important today. 
I am convinced that the foundation we have established—particularly the key forum provided by the S&ED—for engaging China on these and other issues will be critical to navigating these challenges in the months and years ahead.
Few global relationships are as important as the one between the United States and China.  And few global relationships today have evolved as far and hold as much promise.
We understand that we have a tremendous stake in each other’s success and the consequences of our economic policies on the global economy.
I believe my Chinese counterparts would agree when I say, I am proud of the working relationships we have built over the years.  It is essential that these relationships grow even stronger, and the processes even deeper to tackle the significant work that lies ahead for generations to come.
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