The U.S.‐China Strategic and Economic Dialogue (S&ED) is scheduled for May 9-10. On Friday, May 6, Carnegie hosted a media conference call with Douglas Paal to preview the dialogue and discuss its importance for U.S.-China relations.




TOM CARVER:  Hello, good afternoon, this is Tom Carver.  I’m the vice president for communications and strategy at Carnegie Endowment.  And I have with me Doug Paul (ph) – Paal, who is the vice president of studies, whom you know well, and needs no introduction, previously served as the vice chairman of JP Morgan Chase International and was on the NSC staffs of the Reagan and Bush presidencies as the director of Asian affairs.  So we’re going to talk today about the S&ED program.  It’s the 30-minute call, and it will be on the record.  So, I thought I would just open it with a couple of questions to get the ball rolling to Doug, and then pause to see if anyone on the call has questions. 

So, Doug, I guess, you know, first of all, it would be interesting to know how you think both sides are approaching this particular dialogue. 

DOUG PAAL:  Well, the – as people will remember from the headlines of last spring and summer, the U.S. and China had a real decline in mutual trust and a lot of increased suspicions over contested claims in the South China Sea, the East China Sea around the Japanese Senkaku or the Chinese Diaoyudao Islands.  And around North Korea with the shelling of North Korean/South Korean territory and the sinking of the Cheonan frigate or corvette by North Korea. 

And that had taken a lot of the shine off President Obama’s visit to China in late 2009, and it was the subject of a lot of hot discussion at the last S&ED held about this time last year in China. 

This year we’ve gotten onto a much more constructive course in bilateral relations, and the objectives of both Secretaries Clinton and Geithner is to try to cement some of this progress, bring in some of the gains that were made – [inaudible] –state visit and thereafter, and maybe push the frontiers on commercial, financial and regional hot spot cooperation a little more with this visit. 

MR. CARVER:  And is the – it’s not very old, this dialogue, but is it in your view a process that’s growing in importance for the two sides or diminishing?

MR. PAAL:  Well, if you see it only as a once-a-year event, you might take a diminished view of it, thinking that it just isn’t getting somewhere.  But if you look at it in terms of the 55 subgroups that meet between the meetings, you get the impression that in fact it’s grinding away at some of the things that bureaucracies have to grind away at. 

We have a lot of interagency cooperation, and we still have problems in our system.  China has virtually no interagency cooperation.  And so when we confront a problem – say, American business wants to market a product in China or wants to acquire an asset in China – they run up against multiple bureaucracies that don’t talk to each other.  And the S&ED is a format that brings people who in China will not see each other in the course of a year, together, to work with each other, to find solutions to answer to their political superiors on U.S.-China relations. 

And from the – China’s perspective, they’ll come here, and they hear Geithner’s frequent visits to China and others, explaining what the U.S. is trying to do about our fiscal crisis or our long-term debt, or what’s going to happen to U.S. Treasuries.  In this case they get to hear from Bernanke himself, who will be sitting in on the session, plus the chairwoman of the SEC and others.  So if they have questions, probing questions, they can get at people they would not normally see, and so it has a pretty beneficial effect in that sense.  And given that important people can’t make repeated visits to each other, they use these subgroups to fill in the details in the intervening period.

MR. CARVER:  Yeah, I was going to ask you that.  I mean, who are the principal interlocutors on each side?

MR. PAAL:  Well –

MR. CARVER:  – that you know that are coming?

MR. PAAL:  Well, it’s a host of people from every – in China, it’s right down the line of the state council.  And in the United States, it’s almost the entire Cabinet that’s going to be participating in this. 

And a new dimension this year, in response to Bob Gates’ visit to China in January, where he asked the Chinese to address the most sensitive issues in our military frictions, which are cybersecurity, ballistic missile or strategic weapons, national defense mechanisms, ballistic missile defense, and maritime security.  These things have all been very hot on our agenda and Gates – against a China which really doesn’t want to talk about these things – proposed some talks. 

The Chinese countered Gates’ proposal with saying a half-measure, which is – instead of having Gates talking to his counterpart or someone just under Gates talking to a counterpart, just under his counterpart, they would – they proposed that they would send two generals to Washington to meet with the two admirals who already are participating in the S&ED and begin to talk about two of these subjects, one of which is about maritime differences – and when the Chinese say maritime differences, it’s about our reconnaissance activities near their shores – and we talk about maritime difficulties, we talk about our access to the exclusive economic zones without being impeded by the Chinese.  And then they both agreed to talk about cybersecurity.  And there’s a common agenda of keeping crime and rogue elements from dealing with cybersecurity, but there’s clearly got to be a cap on that discussion because both of us have cybercapabilities we don’t want to talk about.

MR. CARVER:  Great, and let me open it up to anyone else who wants to ask Doug any questions.  Is there anyone on the line that would like to ask?  I have a couple more if there aren’t –

Q:  Hello?

MR. CARVER:  Yes, hi.

Q:  Hi,  Yesterday, Kurt Campbell mentioned that among the strategic issues would be Sudan and Iran.  Is there anything new on those fronts?  The developments that you think will come out of this or if we – kind of reiterating what we’ve been saying in the past?

MR. PAAL:  Well, Sudan and Iran will be among the regional conflicts of concern.  We also have North Korea, Libya, Pakistan and others on our list, and there are new things on the ones that I just mentioned. 

Iran, it’s a question of keeping China’s feet to the fire on the promises they’ve made to honor the U.N. security sanctions.  So far China seems to be meeting the very strict letter of the law on those sanctions under U.N. Security Council resolution.

On Sudan, I’m not aware of anything new, except that the situation in Sudan has changed with the split north and south.  China’s got a privileged position in South Sudan, with the government there, and it may be that the Americans would like to draw the Chinese out on what their plans are for military and economic cooperation with the new entity in South Sudan. 

Q:  OK. 

MR. CARVER:  Is Middle East going to be on the agenda?

MR. PAAL:  Well, the Chinese, you know, are completely tight-sphinctered on what’s happened since the fall of Tunisia’s leadership, Ben Ali, and Mubarak and what’s happening in Libya.  They’ve been really having a difficult time getting their underwear out of a twist because they – on the one hand, always fall back on bromides like noninterference and sovereignty must be respected. 

On the other hand, they happened to have 36,000 workers in Libya when the troubles came.  So they’ve had to do a couple of things that they’ve never done before.  They sent long-range air transports to Somalia to exfiltrate people who came across the border from Libya, and they also sent a warship for the very first time in 600 years – a modern warship on a mission through the Suez Canal into the Mediterranean. 

So China is kind of a fledgling – 4,000-year-old fledgling – stretching its wings into a new world, and so there ought to be a lot to talk about.  But they find themselves very caught between – very much caught between the rhetoric of noninterference and sovereignty and all that, and the practical concerns that are mugging them in the Middle East because they’ve grown their economic and other interests around the world and especially in places like Libya.

MR. CARVER:  Have they said anything – this is slightly off the topic of the dialogue – but have they said anything about the demise of bin Laden?

MR. PAAL:  They – in fact, China made a statement shortly after the announcement that was quite a departure from previous statements.  The Chinese did not fall back on that language of noninterference and sovereignty, which could have covered their position.  They acknowledged that this was a major achievement, which puts them in a common agenda with us on terrorism, and they didn’t get in a swivet over their best buddies in Pakistan, who may very well – you know, the Chinese made a statement not knowing whether their friends in Pakistan were complicit or innocent on the question of Obama – of Osama bin Laden.   So it’s actually quite an interesting statement to parse in the aftermath of the –

Q:  You accidentally said Obama just now instead of Osama bin Laden.

MR. PAAL:  I said Obama; corrected myself to say Osama bin Laden.  I hope that’s right.  You know, I keep listening on the radio.  Everybody in the business is screwing up Obama/Osama this week.  I apologize for being another one of them.

MR. CARVER:  OK, are there any other questions?

Q:  Yes, hello.  Can I ask a question?

MR. CARVER:  Sure.  Go right ahead.

Q:  Will Taiwan-U.S. and Chinese relations concerning Taiwan come up and, if so, how?

MR. PAAL:  Well, I’m confident they’ll be discussed because China always tries to refer to its core interests, which have been pared back in the last year to Tibet and Taiwan.  They clearly know that there’s discussion in the air about F-16 C/Ds, and I would expect both the military talks to lay down a marker that arms sales to Taiwan are outside China’s – or inside China’s core interest and that we shouldn’t do it.  And I would expect that it would be touched on in the private talks between Secretary Clinton and Dai Bingguo, the state councilor who leads the security talks. 

Now, this will be something that is in China’s interest to raise, not in American interest to raise.  But I’m sure the U.S. response will be along very familiar lines of preserving the effectiveness of the Taiwan Relations Act and the three communiqués.

Q:  Can I jump in with a question?

MR. CARVER:  Sure.

Q:  I would be interested what you think about how much it will be focused on human rights – I mean, at the human rights dialogue in Beijing – I guess it was last week – certainly, obviously, it’d been public.  I mean, Kurt Campbell yesterday, and I’m sure Secretary Clinton will say that human rights were raised.

But do you think that there’ll be a lot on this, or do you think it’s possible that the Chinese will say, you know, we’ve compartmentalized it, we’ve already had the discussion on that, and this is about – this isn’t about human rights?

MR. PAAL:  Well, I think your instincts are right.  The U.S. will raise it as one of our priorities.  You know, we’ve got foreign policy priorities with China, and they are North Korea, which is very volatile; Iran, which has a persistent problem – human rights; and our maritime frictions; and our absence of military-to-military dialogue.

And so human rights comes right about third in that list, and the U.S. will represent it as such.  The Chinese, I expect, will do as you’ve suspected, and say, look, we just discussed all of that; let’s move on to the next subject. 

They’re in a very tightened-down mode.  I’ve been trying to run to ground what’s bothering the Chinese thinking; they can’t be that bothered about what’s happening in the Middle East that they got themselves locking up every lawyer and activist in China.  But you know, when I sift through all the evidence, they are that excited – that the combination of social media and discontent in China could explode.  And it looks like the Chinese leadership has given the right to the security apparatus to do whatever it thinks necessary to clamp the place down, and that’s what we’re seeing. 

And they apparently have made a decision that if it causes frictions with us or other countries, that’s not as important as having this atmosphere of control prevail in China itself. 

Q:  Thanks.

MR. PAAL:  You’re welcome.

MR. CARVER:  Doug, you wrote a very interesting piece the other day about the new aircraft carrier that’s about to be launched by the Chinese.  Is that likely to feature in these talks?

MR. PAAL:  I think it would be a mistake for the U.S. to feature it.  The aircraft carrier – which hasn’t even gone into sea trials yet; it’s months from doing that – will be a very vulnerable piece of equipment up against American forces if we come – if push comes to shove.

Where we have to be concerned about is, we may dismiss it, but people in Vietnam, Philippines and others who see it sailing in the South China Sea two or three years from now may think this is a real force multiplier for the Chinese in their disputes with China.  And so we are much better off not talking to the Chinese about this aircraft carrier, but talking to our friends in Southeast Asia and Asia generally where this ship is going to turn up, and show them that we still have five carrier battle groups in the Pacific that we can trump anything China puts out there, and that they don’t have to start making concessions to the Chinese because China has shown up with this big boat they bought from the Ukrainians.

It’s kind of – it’s an interesting game we have to play where we show nonchalance to the Chinese, but understanding of the perception gap that exists between us and our friends in Southeast Asia and East Asia.

MR. CARVER:  And then I have one question – by all means, anyone else jump in – but about the new leadership, you know, that’s going to rotate in China in the next 18 months or so.  I mean, should we look to these talks to see any signs of them in any way – I mean, any kind of new directions that the top level of the Chinese leadership would like to take?

MR. PAAL:  Well, actually, I don’t think we’ll see much of that.  This is the swan song for Dai Bingguo; he’s reached the mandatory retirement age, and so this should be his last meeting unless he’s invited to the next one for the handoff to his successor.  There’s a competition going on to be his successor.

And then, the other person who is Geithner’s counterpart, Wang Quishan, is, I think, against his own desires being mooted as the executive vice premier to run the economy for a vice premier who’s been chosen to take office – excuse me, for a premier who has been chosen next year to take office, Li Keqiang, who does not appear to have the – even though he has an economics Ph.D., he doesn’t seem to have the knowledge, ability to run the Chinese economy effectively.  So Wang may be prolonged into service next year, and for the next five years.  And so that might be, you know, a small chance to see him. 

But as I think you should all know, the programming for this has very little public attention; the Chinese did not want to have any big dinners or speeches, probably because they’re holding their heads down over what’s happened in home because of the Middle East.  And they don’t want to have to get protestors outside the hotel, and demonstrations, and the like.  And I think that’ll be an – we won’t see as much of these leaders this time as we have in the previous two “S and EDs.”

Q:  Hi.  Can you hear me?

MR. PAAL:  Yes, please.

Q:  Thanks.  Going a little further on the economic issue, broadly speaking, do you – what are your expectations?  What do you forecast in any progress on that front?

MR. PAAL:  Well, in terms of concrete progress, during the Hu Jintao state visit in January, he mouthed his words to say that they would fix the problem of the government procurement where they were requiring indigenous innovation technologies to be part of a preferment package for people to buy at the provincial and national level stuff for government procurement. 

An American firm screamed loudly, this is forcing us to give away our technology, or it’s freezing us out of the market.  Hu Jintao said he would fix it; to this moment, it hasn’t been fixed.  But it looks like this is going to get – they’re going to tell us during this meeting how this is going to be fixed.  Then we’ll have the reaction of the chamber of commerces – chambers of commerce – and the various firms as to whether that’s a fix, or it’s just a feint at a fix.

We’re looking for some serious discussion about Chinese rebalancing; that is, to shift from an investment-led economy to a more consumption-led economy.  Now, that won’t produce breakthrough announcements, but the results are moving in that direction largely because China is afraid of inflation.  Moreover, inflation is eroding the value of the dollar and increasing the value of the renminbi.  So we’re getting through inflation the devaluation – excuse me, the revaluation of the renminbi and devaluation of the dollar that is improving our export performance into the Chinese market.  So that’s not a product of this meeting, but you’ll hear a lot about it at this meeting.

Q:  OK.  Thanks.

MR. PAAL:  You’re welcome.

Q:  Hi.  Can you hear me?

MR. PAAL:  Yes.

Q:  Yeah.  My question is – it’s to – if I didn’t get you, while you were quite optimistic about the outcome of this kind of a forum, I’m just wondering how do you think – how’s this dialogue –

MR. PAAL:  Well, I was kind of skeptical of this forum when it was first established because, you know, these one-off meetings tend to become shows and not substantive.  But they have been grinding away at the subcabinet level in a number of areas to address all kinds of things, from wind power and recyclable energy forums to very technical things about reform of the Chinese financial market so that American firms might get a larger share of the financial business in China, which is necessary for China to raise the level of its own capabilities because they don’t have competition right now to force them to raise their capabilities.

We’ve got to have more financial supervision.  And for the U.S., we’ve got sins that show all over from 2007 to 2008.  And in China, they have to start adding standards for transactions in the financial sector that are up to international standard.  And we need more transparency about what the standards are and what the regulations are.

That’s just a couple of examples of things that are going to be done across the board with the Chinese bit by bit.  And this is part of having a big relationship:  You can’t snap your fingers and fix everything; you’ve got to get down into the weeds. 

And they’ll be discussing things like American fiscal reforms, the trajectory of the U.S. economy, what we’re going to do about the GSEs in this country, export-control relaxation, and the introduction to the investment climate so Chinese can invest better in the U.S.  And the Chinese have a long list of things they want to know more about from us.

Q:  Yeah.  Thank you.

MR. PAAL:  You’re welcome.

MR.    :  Anyone else?  OK.  Any other final thoughts, though, before we wrap up then?  That was a – that was a great tour of the horizon.

MR. PAAL:  Well, I think this – again, to go back where we started, I think this shows that we’ve gotten out of the heated cycles of attack and counterattack rhetorically between the U.S. and China onto a more constructive path since September last year when Larry Summers and Tom Donilon made a trip to China and said, how do we get to a good state visit?  How do we get relations on a positive path?

And they laid out things that needed to be done, from indigenous innovation to climate change where we had an agreement in Cancun between the U.S. and China – verification, monitoring and reporting, which was impossible in Copenhagen; through restraint on North Korea and its aggressive behavior.

And these things have all resulted in not home runs, but you know, singles and doubles in the relationship.  And this S&ED this week represents another effort to gain a few more positive steps in the relationship – again, not home-run quality but more singles and doubles.

MR. CARVER:  And you say that there’s – it’s going to be purposely low-profile.  But will it be printing out any sort of final communiqué or joint statement after this?

MR. PAAL:  There will be statements of what had been agreed to – it’ll be long lists of things.  Some of it’ll be very small-bore, and then there’ll be high language about the big issues that you can’t do overnight.

MR. CARVER:  Right, right.  But each section will put out their own –

MR. PAAL:  Yes.

MR. CARVER:  Each track, as it were, will put out their own –

MR. PAAL:  They have to do that in order to maintain the support of the business community and public opinion generally for continuing this kind of dialogue.

MR. CARVER:  OK.  Great, well, thank you very much, Doug.  If there are no more questions, then we’ll draw this conference call to a halt.  And there will be a transcript available in due course if you didn’t catch all of it.  Thanks for joining.

MR. PAAL:  Thank you.