Briefing on the U.S.-China Strategic and Economic Dialogue

Special Briefing
David Shear
Director of the Office of China Affairs, Bureau of Public Affairs
Derek Chollet, Deputy Director, Policy Planning, Department of State; Todd Stern, Special Envoy for Climate Change Issues, Department of State; David Loevinger, Senior Coordinator for China, Department of the Treasury
Via Teleconference
Washington, DC
July 27, 2009

MR. KELLY: Okay. Well, welcome to our conference call. We have three briefers today, and I’ll identify them in a moment. I do want to say that the ground rules have moved to on-the- record. Our three briefers today are: from the State Department, David Shear, who’s from our East Asia and Pacific Bureau, he’s Director of the Office of China Affairs; Derek Chollet, C-h-o-l-l-e-t, Deputy Director of Policy Planning at the State Department; and then at the Treasury Department, we have David Loevinger, L-o-e-v-i-[n-]g-e-r, who’s Senior Coordinator for China and also for the U.S.-China Strategic and Economic Dialogue for Treasury.

MR. STERN: Hey, Ian?

MR. KELLY: Yeah.

QUESTION: It’s Todd. Did you have –

MR. KELLY: Oh, I’m sorry.


MR. KELLY: Left off – (laughter) – I left off our special envoy. I’m awfully sorry.

QUESTION: That’s all right.

MR. KELLY: We also have Todd Stern, who is our Special Envoy for Climate Change Issues. And, Todd, I do apologize for that. I was so busy getting the spellings of the other people that I forgot to name one of our key guys here at State.

We would like to have some opening remarks from three people here: David Shear and Todd Stern from State, and then David Loevinger over at Treasury. So I think I’ll turn it first over to Dave, and then to Todd, and then to David Loevinger. So, David Shear, go ahead.

MR. SHEAR: Thanks, Ian. When President Obama met with President Hu in London in April, they agreed that we would pursue a positive, cooperative, and comprehensive relationship for the 21st century. And bringing the State Department and the Treasury Department and all the other American cabinet agencies with an interest in U.S.-China relations is a way of putting the comprehensive – putting meaning into the word “comprehensive” in that characterization of the bilateral relationship.

So we’re pursuing a whole-of-government approach to U.S.-China relations, and the fact that we have upgraded the Strategic Track to Secretary Clinton and State Councilor Dai Bingguo reflects the importance we place – the importance this Administration places on U.S.-China relations, not only in the economic side and the strategic side, but in climate change as well.

So we’re conducting a very broad set of discussions here today. The Secretary just finished a first session in the Strategic Track with State Councilor Dai and a range of his Chinese colleagues – a very constructive, very candid discussion. And this is our effort to identify and then pursue a broad range of common interests with the Chinese. We’re going to spend most of our time getting to know each other in this session, in this round. We’re going to spend a lot of time trying to identify those common interests. And between now and the next Strategic and Economic Dialogue, we’re going to try and devise some concrete ways of going after those common interests.

Why don’t I stop there.

MR. LOEVINGER: Okay. This is David Loevinger from (inaudible) and I’ll speak to you guys on the Economic Track. It was led by Tim Geithner and Vice Premier Wang Qishan. Vice Premier Wang brought all the senior ministers on the Chinese side that deal with economic and financial issues, including Finance Minister Xie, Central Bank Governor Zhou, their head of their banking regulatory commission and the head of their securities regulatory commission. With Secretary Geithner were about a dozen cabinet level and heads of agencies, including Federal Reserve Governor Bernanke, Chairman of the National Economic Council Dr. Larry Summers, the U.S. Trade Representative Ron Kirk, and several others.

And I’d first note that so far, the discussions have been very focused, very serious. It’s been very clear how the crisis has kind of highlighted and reinforced to both sides how independent our two economies are. No one talked about any decoupling. What also came up several times in the discussion is how similar the policy response and the general outlook to events over the last 12 to 18 months has been in both the U.S. and China, and how the U.S. and China, in some ways, have acted more like each other than many of the other major economies.

And in particular, both the U.S. and China have put in place very aggressive fiscal and monetary stimulus policies. Both sides talked about the encouraging signs. They’re seeing how in both places the stimulus policies are starting to take effect. But it was very clear that neither side was complacent at all. They noted that the financial sector, again, in both economies is much better than it was, say, 10 to 12 months ago. But both sides are focusing past the financial sector and, in particular, on the real economy and on job creation.

There was a lot of discussion about how both sides are grappling with the timing of the withdrawal of their macroeconomic stimulus. I think there was general agreement that it’s very important that this doesn’t occur too soon, because the recoveries are still very fragile, but also an acknowledgment that they have to take place at the right time and not let another set of imbalances and bubbles build up in the economy.

And then there was agreement on both sides that as the economy recovers, and looking past that, it’s very important not only to put in place macroeconomic stimulus, but to put in place structural reforms to rebalance the economy. And on the U.S. side, we talked about how the structure of the U.S. economy has changed, and probably changed fundamentally, how savings are rising, particularly household savings, and the Chinese economy needs to adjust to that and promote homegrown growth, particularly growth that’s led by household consumption.

In the next day, there’s going to be discussions about trade and investment policies, about how we’re going to strengthen our financial sector supervision and regulation. And then at the end of all this, we’re going to release a communiqué – we’ll call it a joint fact sheet – which will lay out an agenda, a work plan for the two sides over the next several years, areas where both sides are going to focus on. And also, it’ll demonstrate that we’re going to continue to focus on, where we can, making progress on particular issues of importance to U.S. businesses.

MR. KELLY: Okay. Special Envoy Stern, you want to say a few words about the climate track?

MR. STERN: Yeah, sure. I will be brief. We had a good meeting today. There was substantial focus on climate change and clean energy. President Obama singled out these issues as a priority for the U.S.-China bilateral relationship this morning.

In the plenary session, Secretary Chu gave a quite compelling PowerPoint presentation that focused both on the science and technology aspects of climate change. On the Chinese side, two vice premiers from the NDRC – Vice Premier Zhang Guobao spoke on energy issues and Vice Premier Xie Zhenhua talked about the substantial steps that China is taking to limit CO2 emissions. And if anybody’s got trouble with the spellings of names, we can provide those to you. In addition, Vice Premier Wang Qishan, in his – who was co-chairing the session, in his closing remarks also addressed issues relating to climate change.

Following that plenary session, there was a special session on climate change, and the conversation between the two sides continued. On the U.S. side, John Holdren spoke on what the science is telling us – noted the scientific view that temperature increase ought to be limited to 2 degrees Celsius as compared to pre-industrial times, talked about the impacts of climate change and the like. Carol Browner described the Obama Administration’s domestic efforts on clean energy and climate change, and I talked about the state of U.S.-China cooperation and our efforts on the international front. Mr. Xie spoke again for China, as did Mr. Zhang, and also Madame Ye. I’m not sure the spelling of that, actually. She spoke on forest efforts in China.

Overall, I think it was a quite constructive day, which, of course, had the unusual feature of bringing together many cabinet and sub-cabinet level officials on each side in a way that allowed them to hear the perspectives from the other. I think the level and the breadth of Chinese and U.S. participation highlighted the importance of the issue to both countries and the degree to which climate and clean energy are becoming increasingly seen as interrelated to both economic and national security issues facing both countries.


MR. KELLY: Okay, David, then we’ll hand it over to you now for the question period. We have about 15 minutes.

MR. SHEAR: Right. And I’m just going to defer to the operator to bring in the first questioner.

OPERATOR: Thank you. If you’d like to ask a question, please press * then 1 on your touchtone phone. Please un-mute your phone and record your name clearly when prompted, as your name is required to introduce the question. To withdraw a request, press *2. Once again, it’s *1 to ask a question.

Our first question is from Elise Labott. Your line is open.

QUESTION: Thank you very much. I was just wondering, there were some kind of comments by a lot of Chinese officials over the last several months that perhaps it was the U.S. fault that, you know, the world economy was the way it was and, you know, beared a special responsibility for trying to get us out of it. And I was wondering if you felt that that attitude has kind of dissipated as you start to work more closely together on repairing the world economy.

MR. LOEVINGER: Okay. Again, I think there was a very kind of focused and seriousness of tone in the discussions, and both sides recognized that China and the U.S. are two of the largest economies in the world and whatever each economy does is going to have an impact on the rest of the world. So it was a very practical discussion about what both economies need to do, both respectively and jointly, to help promote both financial and economic recovery.

QUESTION: But you didn’t see any kind of patronizing by the Chinese?

MR. LOEVINGER: I think there were serious questions about what the economic outlook is, what our plans are for withdrawing some of the stimulus – you know, when we think the right time to do that is, to bring our fiscal deficit down to a sustainable level. There was discussion with the Fed about its plans to withdraw some of the monetary stimulus, and Chairman Bernanke talked about, you know, what he talked about earlier – well, I guess last week – on some of the Fed’s exit strategies.

But at the same time, you know, we had some serious questions for China about its fiscal stimulus and its very aggressive monetary stimulus, and we’re asking them questions about how sustainable their policies are and when they think the optimal time to withdraw some of these policies.

QUESTION: Thank you.

OPERATOR: Our next question is from Dan Neumann. Your line is open.

QUESTION: Hi. This is a question more for the Economic Track. We had heard in advance that business groups were pushing for a discussion on China’s industrial policy, including government procurement, which is something you talked about last week, Dave – Dave Loevinger. Can you tell us if those were – you know, if those issues were discussed today? And if so, did we see any common understandings come out, for example, on the government procurement bid, which the U.S. would like to see by October?

MR. LOEVINGER: Yeah. I’d say today the discussion was more on general macroeconomic issues, on the economic outlook in both countries, the fiscal stimulus, the monetary stimulus, what we’ve been doing to repair our financial sector, what the Chinese are doing to modernize their financial sector. Tomorrow, there’s going to be a session, which is going to be led by U.S. Trade Representative Kirk, on trade and investment issues, and we certainly expect that there’s going to be a good discussion on trade issues and certainly on China’s – well, the need for China to accede to the WTO’s government procurement code. And I also expect there will be also a general discussion about industrial policies in China.


OPERATOR: Our next question is from Dipka Bhambhani. Your line is open.

QUESTION: Hi, thanks for taking my question. The – very simple question: What specifically is the U.S. asking China for in the way of climate change?

MR. STERN: We’ve had an ongoing discussion with the Chinese now for some time, and I think that the kind of salient points with respect to China and the other major developing countries are reflected, in effect, in the leaders declaration from the Major Economies Forum, which is to say that, fundamentally, we expect that major countries all need to take actions that are going to significantly reduce their emissions. In the case of developed countries, that’s a reduction against – in an absolute sense, against the baseline. And in the case of developing countries, that’s a reduction against their so-called business-as-usual path, a substantial reduction, but against a business-as-usual path, rather than something absolute.

And that’s the – that is only one element, but is perhaps the most critical element. And you know, we’ve discussed a range of other issues with them, but that’s probably the heart of it.

QUESTION: Can you just – sorry, I just wanted to follow up. Can you talk briefly about the technology element, opening up the – you know, breaking down trade barriers or that sort of thing?

MR. STERN: Well, the overall elements that are part of the climate discussion now include the first one that I just said, which is essentially mitigation. It also includes longer-term, low-carbon paths. It includes a financing package that will need to be put together to provide assistance to developing countries. Technology tends to be discussed also in that same context of assistance to poor countries so that they can start to build a low-carbon path. And again, those are all discussions that are ongoing in the bilateral context, the multilateral, the Major Economies Forum, et cetera.

QUESTION: Okay, thank you.

OPERATOR: Our next question is from Deborah Solomon. Your line is open.

QUESTION: Oh, hi. Thanks. This is for Mr. Loevinger. You mentioned that you had talked with the Chinese about how the U.S. economy is going to change and probably is going to change fundamentally and that they need to adjust their economy. And I’m wondering what their reaction was to that, if they agree or if they have concerns about what the U.S. would like them to do, which obviously would help us as we try to reshape our economy.

MR. LOEVINGER: Yeah. I’d say on this point, there was notable agreement that the world has changed and we’re not going back to 2006-2007, and that if China wants to meet its growth targets – and again, we think Chinese growth is good for the U.S., it’s good for U.S. companies, good for U.S. workers – but if China’s going to grow, it’s not going to be able to grow by exporting to the U.S., and as far as we can tell, to the rest of the world. China is going to have to promote more homegrown consumption-led growth.

And again, when we went speaker by speaker on the Chinese side, I don’t think anybody disagreed with that assessment. And there was a pretty long discussion about what the Chinese are doing in their fiscal policies, in promoting reform of their state-owned enterprises, in doing some of the same things that we’re doing, like promoting healthcare reform, all with the view to reducing savings and increasing consumption.

QUESTION: Thank you.

OPERATOR: Our next question is from Andrea Mitchell. Your line is open.

QUESTION: Thank you very much. I’m curious, in following up one of your opening comments, what was the U.S. response to the Chinese questions about how we’re going to control our budget deficits and how we’re going to restore some economic balance?

MR. LOEVINGER: Yeah. Well, I’d say on the budget deficit, the Director of OMB, Peter Orszag, was there and he led the discussions on the U.S. side. And, you know, he was very clear – and he was also backed up by Summers on this – that the fiscal stimulus we’ve put in place was necessary and it’s the right thing and it’s designed to extend through 2011, but it’s not sustainable at the current rate and that we’re committed by the end of the Obama Administration to bring it down to a sustainable level.

And the only way this is going to get done is looking at all the tools – tax – revenue – changes in revenues, spending cuts, holding the line on spending increases, and most importantly, containing the rise in government spending on healthcare.

QUESTION: And were they specific about the revenue side and specific about how changes in healthcare were going to come about?

MR. LOEVINGER: You know, I think there was a general discussion, because what was most important to the Chinese was to hear about the general trajectory of our policies and –

QUESTION: But if it’s not backed up by specific achievable proposals, how is it meaningful in this kind of conversation?

MR. LOEVINGER: Well, I think Director Orszag talked about proposals that were made in the President’s budget, things we’re doing, working with Congress on healthcare reform, all of which is going to contain the rise in government spending.

OPERATOR: Our next question is from Jim Puzzanghera. Your line is open.

QUESTION: Yeah. On climate change, I just wanted to get a sense of how important these talks are heading towards Copenhagen, and what sense you have that you’re moving towards overcoming some of these obstacles between you and the Chinese.

MR. STERN: I’m sorry, is the question how important is this particular meeting today or – is that what you’re asking or –

QUESTION: This set of meetings this week, the two-day talks, in sort of going forward on that.

MR. STERN: Look, I think that this is part of – I think the talks today are useful and this is part of an ongoing set of conversations. I think Mr. Xie said that – today in the meeting that he counted that he and I had met seven times. I haven’t actually counted that, but that sounds perfectly plausible to me. So, you know, that’s partly in specific bilateral encounters, partly on the margins of other meetings.

But I think this is part of an ongoing dialogue, very useful to be happening at the high level, useful to, in effect, convey, I think in a – you know, you couldn’t convey it in a much stronger way that this issue has risen up to the top of the U.S. national security set of priorities. And, you know, this obviously didn’t used to be the case. So I think that the Chinese could not help but get the message that this issue is of high importance to the President, the Secretary of State, the Secretary of Treasury, the Secretary of Energy, et cetera. So I think all of that is quite useful, and a meeting like this with the kind of elevation that it involves is certainly helpful.

With respect to prospects, you know, we’re slogging ahead. I think that we will get there. I think we will end up with an agreement. But the perspectives of the major developing countries like China, India, and the others is quite different. The issues are difficult. There is a lot of engrained and embedded perspective on this issue that goes back now for 15 years. And, you know, I think I’m not going to kid anybody; I don’t think it’s easy, but I do think that we will get there, and I think that there is a lot of interest on the Chinese side fundamentally to arrive at a constructive and successful outcome in Copenhagen. And I do think we will get there, but I think it’s going to come one step at a time, one meeting at a time, one conversation at a time, and not in some sudden fell swoop or sudden breakthrough.

QUESTION: Has it risen to – has the importance risen in the Chinese Government? Do you get any sense if, in reaction to the increasing importance from the U.S. Government, whether this is rising in the significance that they’re giving it, in terms of an issue to deal with in the relationship with the U.S.?

MR. STERN: I think so. I mean, my sense is that the answer to that is yes. I think that – you know, going all the way back to February, I went to China with Secretary Clinton in February and she had three priorities on that trip, which were the financial crisis, the climate change crisis, and national security – the hotspots, if you will, like Korea. And she emphasized all of those issues, all of them, including climate change and energy, with everybody, with President Hu Jintao, with Wen Jiabo, with all of her interlocutors.

When I went on my own trip in June, I met with very senior people. You know, I think that they do see this as an issue that is of very significant importance, kind of just as a substantive matter, but also of real importance in the U.S.-China bilateral relationship, and increasingly something that’s going to be important for their own – for the way they are perceived by the rest of the world. So I do think that that’s – that that is sinking in at high levels.

MR. SHEAR: Conference operator, we have time for one more question.

OPERATOR: The last question is from Andrew Gorcester. Your line is open.

QUESTION: Thank you. In the SED opening ceremony statement, Secretary Geithner mentioned reshaping the architecture design – or, excuse me – reshaping the global economic architecture. So the question is: Is that reshaping of the architecture including changing the Bretton Woods system? Is that on the agenda of the SED? And if so, specifically, what parts of the architecture might be worked on?

MR. LOEVINGER: Yeah. This is going to come up in tomorrow’s session. But it came up just a little bit in some of the discussion today. I think both sides are in agreement that there’s a whole range of international economic institutions, including the Bretton Woods institutions that were created and whose corporate governance was established when the world looked very different. And both sides, I think, agreed that these institutions need to be modernized to reflect the rise of China and other dynamic emerging market economies.

I think there is a strong desire on the U.S. side to bring China in. Our agenda isn’t yet finished to bring China in to the full range of institutions that the U.S. had a big role in creating in the postwar period to project our values into the global system. And we also think as China gets bigger and bigger, it has a responsibility to play – to make sure that the global economy and global financial system functions well. And these international financial institutions play a central role in all of that.

QUESTION: Thank you. Just a brief follow-up question. Is the U.S. dollar’s role as the world reserve currency on the table as well?

MR. LOEVINGER: I think we had – it was a full discussion of a range of economic and financial issues. We talked about China’s exchange rate policy, they talked about their desire to reform the international monetary system, and I’ll just leave it at that.

QUESTION: Thank you very much.

MR. SHEAR: I think that concludes the call. Thank you very much for your participation.

MR. KELLY: Thank you all.

OPERATOR: Thank you for your participation. You may disconnect at this time.

PRN: 2009/783