Scott Eldridge II: Just another Guanxiblogs.com weblog

Quick post: there are big economic talks going on in Washington. The usual players, Susan Schwab the U.S. Trade Representative, Carlos Gutierrez, the Commerce Secretary, Treasury’s Henry Paulson …. and China’s 15 diplomats including Vice Premier Wu Yi.

Here’s the story from the washington post .

Something I find interesting: China’s officials are upset that the U.S. has filed trade cases on Intellectual Property, and using other forms of trade remedy including countervailing (anti-subsidy) duties. The complaint, according to the WP is that these things  are better handled through dialogue.

Maybe it’s just me, but I distinctly remember covering SEVERAL rounds of dialogue on all these issues, and certainly remember there being even more rounds since I stopped staring at the stuff every day.

My point is there is a time when talking stops producing results. There have been so many statements, dialogues, agreements to revisit issues, and diplomatic memos to make your head spin.

A few candles have been added to the cake since I first started following these talks.

So is this politics? international shows of strength? an effort to come in strong to Washington, where bravado and strong statements can have as much force as actual agreements?

I think it has a little bit of all of these.

Robert Samuelson wrote a fantastic column in today’s Washington Post about China trade that hits on everything from currency to trade deficits, to the difficult to explain current account balances.

 Everyone complains about America’s trade deficits, but they actually symbolize global leadership. Access to the U.S. market has promoted trade by enabling other countries to export. But the deficits cannot grow indefinitely. Imagine now a trading system whose largest member seems intent on accumulating permanently large surpluses. Nor, it might be added, are surpluses ultimately in China’s interests. They drain too much of its production from its citizens and contribute to growing domestic economic inequality. What everyone needs is more balanced Chinese economic growth, less dependent on exports.

Samuelson is a great guy to sit and chat about this stuff with. I remember early on, as a teenager,  when I would try to read his columns and they intimidated me. Meeting him at a talk on China currency in Washington many years later - when Morris Goldstein and AL Keidel were debating the finer points of currency manipulation - I found he was an incredibly comfortable person to sit and have a conversation about the most minute details of economy.

He knows his stuff, there is no doubt, but he is what epitomizes a good columnist - an interest in finding out more and more about a subject. We picked each other’s brains over questionable coffee, and free sandwiches, and both left all the wiser. At the time, I was more up to speed on China currency legislation, and he asked me question after question, even professing that he had read my recent articles and was now trying to catch up with the movement on Capitol Hill. It goes to show that no matter how preeminent someone is, or how nameless someone else is (me), there are always people you can learn from … and be intimidated by.

So it’s been a little while … But I’m back, and ready to dig through the headlines for all the China related news. I promise, it won’t all be trade news, but it will retain its high level of geekiness. Let’s start with something that touches on my area of geek-xpertize … that is trade policy.

• Pet Food

There’s a lot of chatter right now revolving around  pet food nowadays. Ever since, a fewmonths ago, a dozen cats and dogs got sick, and some died, from tainted pet food, there has been a flurry of hypersensitivity about the issue of bad pet food. As CBS’s Allen Pizzey suggested, this might be something that has suffered from the American tendency of over coverage. Calling in from Iraq, he suggested comparing a handful of pet deaths to the daily news out of Baghdad and … well … there is no comparison.

But the pet food issue does raise a very interesting point, and one I heard discussed on NPR the other morning. There is incredible pressure within China for companies to export … a whole lot. There is incredible pressure on the exporters to out pace importers by as much as possible. This pressure goes down the chain, and at some point reaches the customs inspectors, who may feel less urgency to make sure every outgoing container’s contents match its manifest. This is not a new occurrence (let’s just say that in known past examples, silk fabric came out of a cargo container looking very much like cotton trousers).

But this whole pet food mess has brought us back to China, where there are methods in question. First we heard that gluten had been tainted.

Now the catch word is Melamine, and the scuttlebutt is China has been adding this stuff to their pet food to create the illusion of high quality … that’s the basic angle. This stuff basically triggers higher scores on food value tests. They used to do it with Urea, which is loaded with nitrogen.

The problem: This stuff has lead to dead pets, and may be in human food now. Pets are cuddly, so they made for soem big headlines, but I eat chicken, and am not particularly keen to the idea of something being in my bird that could harm me. (Ummm … free range, antibiotic-free and organic debates to be held another day).

The China angle: trade security, food inspection, and are the necessary standards in place? What can be done? Where do we put the foot down, at our ports or theirs?

This is what I hope gets worked out in the near term.

Honestly, I love animals, and may even one day have a cat or dog, but I have to agree with something Pizzey said in his CBS blog from Iraq:

“How 12 dead animals in a country the size of the U.S. rates with the sliding scale of mayhem here is what I’m finding hard to gauge. When only 12 human bodies are found on any given morning in Baghdad with marks of the kind of torture the ASPCA would quite rightly have a pet owner in court for, it is judged as ‘progress’ for the security plan.”

Scott Eldridge II reporting:
The hot-button nuclear issue has been prevalent in the news lately. Six-party talks with North Korea are on again, though they got off to a decidedly rocky start, India and the U.S. have a new civilian nuclear deal and, sneaking in under these headlines, China struck a civilian nuclear deal as well.

Sam Bodman, U.S. Secretary of Energy, was in China last week as part of the high-level talks between U.S. and Chinese officials. I speculated last week that I thought perhaps he was going to be talking about coal and oil consumption. I, like everyone else who I didn’t hear or read mention it, forgot about the Westinghouse deal.

As the Associated Press reports today (via the Washington Post ) Bodman helped hammer out a deal that allows China to purchase Westinghouse-made nuclear generators. (Energy Dept. Release)

This is one of those deals that has been swimming around the trade world of Washington, DC for some time. It has been alive and dead and alive again, and has met opposition on the hill, and in the Export-Import Bank, which secures financing insurance for large deals such as these.

Immediately this is being touted as a success for Westinghouse, who had been lobbying China to go with its product over a French competitor Areva. The Pennsylvania-based manufacturer is guessing another 5,000 jobs will come from the reported $5.3 billion deal, and the U.S. is saying that this will make a difference in the now $214 billion trade imbalance between the two countries. Bodman also pitched the deal as a way to secure a non-fossil fuel energy source for China, which is becoming a greater and greater consumer of energy (still down the ladder from the ravenous U.S. appetite).
According to the AP:

“This is an exciting day for the U.S. nuclear industry,” Bodman said at the ceremony. “It is an example that if we work together, we can advance not only our trade relations but also our common goal of energy security.”

In my own defense, my guess that Bodman was meeting about oil while in Beijing appears to be part right. Again, the AP:

It [the deal] was signed on the sidelines of a closed-door meeting of five major oil-importing nations hosted by China.

Who else will remark on this?
I expect there will be some talk about the technology transfer aspects of the agreement (where the Chinese partners own rights, or partially own rights, to the intellectual property of the generators after a certain amount of time).

There will inevitably be the “trust” factor raised by some who see China as a military threat, as well as an economic one. On Capital Hill there are a number of congressmen who have railed against deals such as these , but at some point doesn’t it become a bridge builder and not a threat to have a major deal between a U.S. company and China?
However, as recently as 2005 there were legislative restrictions forbidding the Ex-Im bank from helping finance the deal. It gives the impression that not everyone in Washington is going to be happy with this deal.

With Congress out and Washington getting ready for a long winter nap, this may not be subject to any headline grabbing backlash, but if I grab any headlines myself, I’ll pass them along.

Scott Eldridge II reporting:

Well two days of dialogue sure can move quickly. The economic talks between Treasury Secretary Henry Paulson and his fellow cabinet leaders and Chinese officials, led by Vice Premier Wu Yi have wrapped up with either consensus on necessary reforms, or China refusing to budge on its positions.

These sorts of talks (strategic economic dialogues, bilateral dialogues, working groups, joint commissions … there are lots of terms for these things) often end with “Fact Sheets” and “Joint Declarations,” parlance for the types of agreements that will be revisited next time a dialogue takes place (in this case May of next year in Washington, D.C.).

But they also shine a light on the way we describe the same conflict from either side of the Pacific.

Take two headlines for the same “wrap-up” style of story.

The Washington Post, has the following headline: China Refuses to Make Commitments on Exchange Rate
Here’s the first paragraph (the lede):

BEIJING, Dec. 15 — China today declined to make any firm commitments regarding changes to its exchange rate, despite continuous pressure from U.S. officials over two days of high-level strategic economic talks.

Xinhua, China’s state news service, has this headline for the same type of story: “China-U.S. first strategic economic dialogue ends” and opens the story with this paragraph:

BEIJING, Dec. 15 (Xinhua) — China and the United States concluded their first strategic economic dialogue here at noon Friday, with “a number of consensus” being reached. The second dialogue will be held in Washington in May next year.

Now, I’m still poking around to see if I can see what was exactly decided, but initial results say both stories are right. China agreed to move its currency, but at a pace it determines is appropriate, and the U.S. agreed to increase its savings rate (the rationale being that more savings equals less purchasing, which would lower the skewed bilateral trade balance between the two countries).
But it is interesting to see the two very distinct ways the stories are being put out there.

More later ….

Scott Eldridge II reporting:

The economic dialogue is underway in China, and according to The Washington Post the talks got off to a fiery start, with Treasury Secretary Paulson insisting that China allow the yuan to float according to market forces, and Chinese Vice Premier Wu Yi giving a 20-page opening statement, that covered 5,000 years of Chinese history and reminding her U.S. counterparts that China, like the U.S., has to look out for its own interests. It is a familiar refrain to hear that the U.S. officials, and people, don’t understand their Chinese counterparts, one that is not always inaccurate. Read the story here.
Some things I found particularly interesting:
Vice Premier Wu is highly respected by her U.S. counterparts and is considered a formidable opposite at any negotiating table. She raises the issue of China’s growing labor force, and again said that U.S. officials did not fully understand the differences and needs of China’s economy.
According to the Washington Post:

“Some American friends are not only having limited knowledge of, but harboring much misunderstanding about the reality in China,” Wu said, according to a copy of her remarks provided by the Ministry of Foreign Affairs. For example, Wu noted that China needed to create enough jobs to absorb an estimated 300 million rural workers into its urban economy in the coming two decades.

Maybe they should start reading Guanxi.

Also, according to the Post,

As the meetings took place, China set the yuan’s daily midpoint at 7.8197 per dollar, a gain of 3.7 percent since its revaluation in the summer of last year.

This is interesting. China revalued the yuan about 2 percent last summer, and since then, it has only moved in small, small amounts, against a basket of currencies widely believed to include the Japanese yen, Korean won, euro and the U.S. dollar. However, most officials consider the yuan to be essentially pegged to the dollar. The revaluation to 7.8197 will likely be interpreted in every direction in the coming days. We’ll certainly check in to see if any of Guanxi’s currency and economics contributors write on this topic in the near future.

Ask anyone who has covered this sort of news in Washington, and it is nice to see the change, with Paulson “taking the gloves off” a bit. Those of us far away from the action think it would be great to see this back and forth in person.

Well this makes for a first day blogging hat trick

Scott Eldridge II reports:

It should also be pointed out, Paulson is not exactly traveling alone. Here’s the presser from the Treasury Department:

Treasury Secretary Henry M. Paulson and a delegation of Administration officials are in Beijing for the inaugural meeting of the U.S. – China Strategic Economic Dialogue. Secretary Paulson is joined by Commerce Secretary Carlos Gutierrez, Labor Secretary Elaine Chao, Health and Human Services Secretary Mike Leavitt, Energy Secretary Sam Bodman, U.S. Trade Representative Susan Schwab, EPA Administrator Stephen Johnson, and other Administration officials. In addition, Federal Reserve Chairman Ben S. Bernanke will join the Strategic Economic Dialogue discussions

It will be interesting to see what other issues are raised at this dialogue, but looking at the names you could predict that: Gutierrez and Schwab will bring up trade concerns (everything from IPR, investment and trade deficits, to China’s recent completion of WTO accession), Leavitt’s department has been interested in both Avian Influenza and the public acknowledgment of AIDS/HIV in China, Johnson would be interested in China’s pollution and environmental record, which we’ve covered in Guanxi and Bernanke would likely be alongside Paulson on talks on currency controls, and addressing the trade balance. And, as China continues to grow as a global energy consumer, Bodman’s talks will likely focus on coal, oil, and other fuel consumption.

Here’s the full press release

Scott Eldridge II reports:

Henry Paulson, the U.S. Treasury Secretary, is in China meeting with Chinese officials including premier Wen Jiabao and president Hu Jintao. NPR’s evening news program “All Things Considered” had an interesting piece last night about how Paulson, the former head of Wall Street giant Goldman Sachs has the opportunity to create a legacy for himself if (and this seems to be an important if) he can convince Chinese officials of the U.S. perspective on its currency controls. Washington has for a long time been trying to get Beijing to ease controls on the yuan, threatening everything from tariffs to World Trade Organization action, but as of yet most experts say little or nothing has been done to let the yuan float.

An interesting side note to the NPR story: Paulson has already had a very successfully career, and back when his name was being bounced around as a successor to former secretary John Snow to take the helm at Treasury, it was widely reported that he did not want the job, but saw an opportunity to do something more at Treasury. NPR reports that the “something more” could be fixing the “China problem.”They go on to say that of all the problems President George W. Bush is having politically (the war in Iraq, Iran and North Korea Nuclear issues, and more) he could still create a political success story if he finds some sort of victory in dealing with China.
It’s worth a listen. Guanxi readers will recognize Peter Morici from the first issue of Guanxi: The China letter on “The China Threat?”, in which he contributed a piece on the trade deficit.

Marketplace, another public radio program, had an item on its morning program on Thursday as well.