Press Center

 Remarks by Under Secretary Lael Brainard on China at the Center for American Progress (CAP)


7/18/2012


As prepared for delivery

WASHINGTON - Our country’s economic future lies primarily in our own hands.  But the choices China makes as it navigates its next phase of development will matter greatly for the kind of international playing field our companies, workers, farmers, and ranchers will face.

That is why the President has worked hard from day one to make our economic relationship with China more balanced so that it yields greater benefits for American workers and exporters and China no longer plays by a different set of rules.

At every juncture, the President and his economic team have pressed China to abide by international norms, especially given its outsized role in the international trading system.  We have highlighted the costs of not adopting these norms, and we have moved forward with forging higher standards with like-minded countries.

The President has demanded changes where our core economic interests are at stake, and we have used all available mechanisms effectively and aggressively to defend them—including through the World Trade Organization (WTO) and the newly-created trade enforcement center that investigates unfair trading practices. 

We have sought to work with the grain of the reform agenda many in China are advocating.  We have highlighted the importance of rebalancing growth and leveling the playing field so that China avoids the middle-income trap and navigates its demographic transition.

And we have done so without undue drama by cultivating greater clarity and predictability in our bilateral engagement.  We have worked hard to find common ground, recognizing that the first and second largest economies share an overwhelming interest in building a more robust global economy.

Today, our approach is yielding measurable gains.  Exports to China have grown by over 50 percent since 2009—in line with the President’s strategy of doubling exports in five years.  For the first time in decades, consulting companies are highlighting the attraction for global companies of bringing jobs to the United States, or “insourcing” their operations—citing heightened competitiveness relative to other markets.  And employment in U.S. manufacturing has increased month after month, adding more than 500,000 new jobs since 2010.

Let me briefly elaborate on these four aspects of our approach.

First, China’s economy is now too large for it to pick and choose which rules it will follow without risking the integrity and legitimacy of the international system on which China’s growth depends. 

China’s persistent exchange rate undervaluation in the years following its admission to the WTO is a vivid example of the impact China’s policy choices have on the international system.  From the time China joined the WTO to 2006, its trade-weighted exchange rate depreciated by 15 percent, adjusting for inflation.  Of course, with China’s productivity growth outpacing that of its trading partners, we should have seen strong appreciation throughout the period.  This was not just our assessment; it was the International Monetary Fund’s (IMF) as well.  China’s current account surplus shot up from roughly 1 percent of GDP to over 10 percent by 2007. 

To compensate for the RMB’s growing undervaluation, China’s trading partners either resisted appreciation of their own exchange rates, thereby amplifying the distortion, or bore an undue burden of adjustment.  The strains placed on the global economy sorely tested the legitimacy of the WTO and the IMF.

From day one, we have stressed that this approach is bad for China and unacceptable to the United States. 

With demand in many advanced economies expected to remain weak for some time, and with a steep demographic cliff fast approaching, China faces tough choices to sustain growth and avoid the middle-income trap.  The policy choices China makes will be important to America’s economic interests—to our exports, our workers, our businesses, and our farmers.

Only by moving from an economy dependent on external demand and exports to one driven by domestic consumer demand; an economy dependent on over-investment in resource-intensive industries to reliance on higher value activities; and an economy dependent on adoption and adaptation of foreign technology to one that nurtures innovation, can China sustain its growth.

As it makes this transition, China’s domestic goals will be well served by the same principles that we pursue in our trade and investment agenda.  China will be able to transition to higher value activities and develop robust innovation capacity only if it protects and enforces intellectual property rights, opens its government procurement market, eliminates preferential treatment of state-owned enterprises (SOEs), and compels its exporters to compete on the strength of their product offerings.  It will not work with below-market input prices, an undervalued exchange rate, and pervasive intellectual property violations. 

Of course, as China makes this transition, it will have a growing interest in improving access to investment opportunities in America’s dynamic markets and to our highly innovative products and services. We are willing to make progress on these issues, but our ability to do so will depend on how much progress we see from China.

And we are seeing some progress.  Alongside China’s growth in wages—a welcome boost to household incomes—exchange rate appreciation is starting to make a difference for our exporters and our workers.  China’s current account surplus has fallen by over 6 percentage points of GDP, reflecting an 11 percent appreciation of the currency against the dollar in inflation-adjusted terms. 

China has taken a number of steps in recent months to reform and open its financial markets, which are critical to leveling the playing field and making the transition to sustainable growth.  China has widened its exchange rate bands and reduced intervention in the foreign exchange market.  China’s capital controls are being cautiously dismantled.  Financial authorities are allowing greater market determination of interest rates.  Through the U.S.-China Strategic and Economic Dialogue (S&ED), we have secured improved access for foreign financial services firms in securities and casualty insurance, as well as a greater ability for them to expand their offerings of financial products. 

But this is not enough.  We will continue to press China to make more progress and provide greater transparency to meet its G-20 commitment to enhance exchange rate flexibility, avoid persistent exchange rate misalignment, and refrain from competitive devaluation.

We will continue to press China to address the rampant theft of intellectual property, including trade secrets, to meet international standards.  Following intense engagement at the highest levels, China reversed a set of policies that would have discriminated against foreign intellectual property.  In large part because of efforts by the Department of Commerce and the U.S. Trade Representative (USTR), China established a high-level mechanism under the leadership of China’s State Council to oversee enforcement efforts, including efforts to discourage government use of pirated software.  But far greater resolve will be needed if China is to re-join the ranks of the most innovative economies—including working together to stem the growing challenge of cyber-enabled intellectual property violations. 

It is also important to address the privileges enjoyed by China’s SOEs, which create an unfair advantage that hurts China’s private enterprises no less than for U.S. competitors.  That is why it was significant when Chinese authorities committed in this year’s S&ED to ensure that credit, taxation, and regulatory policies would apply on a non-discriminatory basis across enterprises of all types and to increase the portion of profits China’s SOEs must pay out in dividends comparable to other publicly-listed companies.  During the years when China’s external imbalances ballooned, the high profits retained by China’s SOEs were a major contributor to those imbalances.  Going forward, unlocking SOE savings will help level the playing field and provide resources to boost social spending. 

Second, with China now big enough to have a “systemic” impact across a range of dimensions, China can no longer insist on one set of standards for the big players and another set of standards for itself.  In turn, we recognize that China must be at the table as global standards are set.

So, for instance, it was critical for China to be at the table as the Financial Stability Board and the G-20 negotiated global standards for bank capital, orderly liquidation of financial institutions, and over-the-counter derivatives.  Along with the other emerging market members, China has taken on the same set of responsibilities as advanced economies, which is essential as its financial markets grow.

While export finance in the United States and other key export nations have long been bound to a set of understandable international disciplines, China’s exporters have derived benefit from a confusing and opaque export financing system.  Early this year, President Obama made clear we were prepared to match unfair financing to ensure a level playing field for our exporters.  And since then, China has agreed to join negotiations on international rules where they will be included for the first time—a critical step as we ensure that our world class exporters are able to compete once again on the strength of quality and price, with trade finance to support, not supplant, market competition.

China’s vast procurement market has also been outside the international system for too long, despite its repeated promises to join the WTO Agreement on Government Procurement (GPA).  But we are no longer idly sitting by. The United States has been clear that access to much of our government procurement would depend on commensurate access under the terms of an accession agreement by China to the GPA.  We are pushing China to incorporate these elements and look forward to seeing a stronger offer before the end of this year.  It is critical that China’s accession to the GPA provide U.S. businesses with improved access not just to its large central government procurement market, but also to sub-central procurement that accounted for an estimated 93 percent of total government procurement in 2010.

And through the Trans-Pacific Partnership (TPP) Agreement we are designing the standards that will constitute the new frontiers for 21st century trade agreements in the key export markets of the Asia-Pacific region.  With product cycles and competitive advantage being driven in market time, international standards must continue to move forward.  It is thus vital that the TPP address the full scope of disciplines relevant to an open and fair trading system.  By working with like-minded countries, we are setting high standards, with the open architecture of the TPP a pathway for additional countries to raise their standards to commensurate levels.

Third, President Obama has demonstrated his determination to use the legitimate enforcement tools we have available to ensure our trading partners play by the rules as a core part of our trade strategy.

That is why it was important to demonstrate early on this Administration’s determination to enforce the Section 421 China-specific safeguard mechanism after eight years of disuse, during which safeguards were not imposed in a single one of the cases brought successfully by private industry.

That is why the President created a new Interagency Trade Enforcement Center to coordinate enforcement and focus tirelessly on challenging unfair trade practices around the world.

That is also why USTR has pursued WTO challenges at twice the prevailing rate of prior administrations.  Earlier this month, USTR launched a WTO case against China for imposing unfair duties on more than $3 billion on 80 percent of U.S. auto exports.  USTR has strategically taken cases forward so that each case, such as that of export restraints of certain raw materials, lays strong foundations that can be used to dismantle restraints in other key export areas, including rare earths, which are key inputs in U.S. advanced manufacturing products like wind turbines and lithium ion batteries.  And earlier this week, we successfully challenged China’s discriminatory limitations against foreign electronic payment systems in the WTO.

Finally, it is essential that we place these efforts in the broader context of systematic efforts across the Administration to expand and strengthen channels of communication with Chinese decision makers.  We have pursued our agenda with China in a way that creates predictability and clarity, pursuing areas of cooperation even as we press to resolve problems.

The challenging external environment has necessitated close collaboration with China to steer a more resilient global recovery.  We supported a greater role for China in key international economic groups, recognizing that Chinese authorities have been pragmatic and active in supporting growth in the face of recurring bouts of financial stress from Europe. 

The Administration’s engagement with China has been intensive and highly prioritized since day one, from the White House and across all economic agencies.  We have maintained continuous interaction at all levels with the Chinese government across the full range of economic issues through mechanisms such as the Joint Commission on Commerce and Trade, the Innovation Dialogue, and the Investment Forum, to mention a few.  Under the leadership of Secretary Geithner and Secretary Clinton, the U.S.-China Strategic and Economic Dialogue has strengthened relationships and mechanisms that have enabled us to pursue these priorities effectively at the highest levels.

China is critically important to us.  Getting this relationship right is essential.  We have made significant progress, but we know, just as you do, that what matters is not just what we agree to on paper, but what really happens on the ground.  That’s why we remain vigilant and focused, using all appropriate tools and leverage to make a difference for our workers and our businesses.

Thank you.

 

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