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C O N F I D E N T I A L SECTION 01 OF 06 BEIJING 005529 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT PASS H 
STATE PASS USTR 
USTR FOR PORTMAN, WINTER, MCCARTIN 
USDOC FOR DAS LEVINE, ITA/OCEA MCQUEEN AND CELICO 
TREASURY FOR ISA - DOHNER AND KOEPKE 
NSC FOR WILDER, SHIRZAD 
 
E.O. 12958: DECL: 03/24/2016 
TAGS: PREL ETRD EFIN WTRO PGOV OREP CH
SUBJECT: PART 1 OF 2:  CODEL GRAHAM-SCHUMER MEETING WITH 
VICE PREMIER WU YI, MARCH 23, 2006 
 
Classified By: DCM David S. Sedney, Reasons 1.4 (B) and (D). 
 
¶1.  (C)  Summary.  In a March 23 meeting with Vice Premier Wu 
Yi, Senators Lindsey Graham (R-SC) and Charles Schumer (D-NY) 
strongly urged near-term reform of China,s exchange rate 
policy as a key step to promote a successful April visit to 
the United States and to preclude Congressional action on 
China trade bills, including their own proposal to impose 
27.5 percent tariffs on U.S. imports of Chinese goods.  Wu Yi 
said that bill would harm both Chinese and U.S. interests, 
and likely would not withstand a challenge in WTO Dispute 
Resolution proceedings.  The Senators expressed cautious 
optimism about what they had learned in earlier Beijing 
meetings about Chinese intentions with respect to exchange 
rate policy, but urged Chinese actions and statements to make 
China,s case known to the American public, Congress and the 
Administration.  Wu Yi said exchange rate policies are 
sovereign matters for each country to decide, and China could 
not be faulted before the International Monetary Fund or WTO 
for non-compliance with any rules in those organizations. 
China will follow principles of self-initiation, 
controllability and gradualism in expanding flexibility of 
China,s floating exchange rate.  China in the twenty-first 
century is not Japan in the 1980s, and the United States 
should not pressure China now as Japan was then.  China will 
never surrender to external pressure.  Detailed points on 
China,s exchange rate policy outlined by People,s Bank of 
China Governor Zhou Xiaochuan at an earlier meeting will be 
published at an appropriate time in the future. 
 
¶2.  (C)  Summary continued:  The bilateral trade deficit is 
complementary, not competitive, Wu Yi asserted, with much of 
the rise in the U.S. deficit with China attributable to 
shifts of final manufacturing to China from other Asian 
countries with which the United States had earlier trade 
deficits.  U.S. export controls on high-tech goods also 
contribute to the trade imbalance.  China will soon be 
importing one trillion dollars of goods per year, and U.S. 
firms could provide a large share of those imports.  Chinese 
trade and investment missions totaling 150 entrepreneurs will 
soon visit the United States, with particular interests in 
soybeans, cotton, computer software, aircraft, automotive 
parts and machinery.  Wu Yi will personally announce China,s 
measures to improve IPR protection at the April 11 Joint 
Commission on Commerce and Trade meeting in Washington. 
Improved IPR protection in China is in China,s own interest, 
and recent release of an IPR Action Plan is an historic and 
important step by the Central Government.  China will 
establish 50 IPR complaint centers in cities across the 
country over the next three years, and China is preparing to 
join the WIPO Internet Treaties.  IPR protection at trade 
fairs in China has been enhanced.  The Ministry of Public 
Security will publish more data on IPR enforcement action 
achievements by the end of March.  Purchase of legitimate 
computer software will be promoted to Chinese enterprises and 
individuals.  Still, IPR protection cannot be established 
overnight in China, a developing country with a low level of 
scientific and technological achievement.  The Vice Premier 
said China will welcome more visits by Senators, 
Representatives and Congressional staff members.  End summary. 
 
Welcome to Zhongnanhai 
 
¶3.  (SBU)  Vice Premier Wu Yi welcomed the Senators and said 
she was pleased to have opportunity to get to know them.  She 
said the visit was the Senators, first to China, so they did 
not have a realistic or good understanding of actual 
conditions in China.  While the Senators had said things in 
the United States that were not friendly to China, China 
still welcomes their visit with hospitality.  She explained a 
Chinese adage equivalent to "Seeing is believing," and said 
Chinese officials had taken note of the Senators, growing 
understanding of China as reflected in friendlier comments 
made since their arrival several days earlier.  These 
comments encouraged Chinese officials.  The Vice Premier 
requested that she first address the issues of the exchange 
rate, the trade imbalance, and intellectual property rights 
protection in China followed by their points and discussion. 
The Senators accepted the meeting host,s recommendation, and 
she continued what became an hour-long discourse. 
 
Exchange Rate Policy 
 
¶4.  (C)  The Vice Premier noted that the CODEL had already 
met with People,s Bank of China (PBOC) Governor Zhou 
Xiaochuan, whom she described as a foreign exchange policy 
expert and the official with the authority to make forex 
policy decisions.  Wu Yi said that China,s foreign exchange 
regime complies with International Monetary Fund 
requirements.  Each country can decide its own exchange rate 
mechanism, whether a floating exchange rate or managed 
floating exchange rate.  China,s exchange rate system does 
not violate any WTO rules and China,s exchange rate actions 
have been consistent with commitments undertaken when China 
joined the World Trade Organization.  The WTO is a 
multilateral organization that lacks compulsory standards for 
exchange rate matters and indeed lacks competence on exchange 
rate issues.  There is no internationally accepted definition 
of "exchange rate manipulation." 
 
¶5.  (SBU)  In order to further promote opening up and reform, 
China on July 21, 2005 adjusted its exchange rate mechanism 
to become a market-based managed floating rate with reference 
to a basket of currencies.  Since then, important measures 
had been implemented to enhance that reform, stabilize the 
market, streamline supervision and diversify products in the 
Chinese financial market.  Since the July reform, the 
exchange rate had appreciated and depreciated, moving up and 
down, and through March 20, the renminbi had appreciated more 
than three percent.  That three percent appreciation has been 
helpful for the global economy and for the economies of 
China,s Southeast Asian neighbors in particular.  China had 
received objective positive responses to its July reform. 
The renminbi,s value can go up or down now in accord with 
market forces and changes in currency markets. 
Administrative measures to appreciate or depreciate the 
renminbi are no longer an option for China, Wu Yi said. 
 
¶6.  (SBU)  China will follow principles of self-initiation, 
controllability and gradualism in reforming the exchange rate 
mechanism and expanding flexibility of the floating exchange 
rate.  Through these principles, China hopes to achieve and 
maintain a stable exchange rate at an adaptive equilibrium 
level.  China has a responsible attitude on the exchange rate. 
 
--  Advice for America re China,s Exchange Rate Reforms 
 
¶7.  (C)  The Vice Premier offered the following advice to her 
visitors:  Tell your American friends not to use methods from 
the 1980s as were used against Japan.  China is not Japan. 
Those methods will not work on the Chinese people of the 
twenty-first century.  China will not surrender to external 
pressure.  The only acceptable way forward is through 
dialogue on an equal footing.  External pressure will lead to 
a backlash from the Chinese people.  Wu Yi concluded her set 
piece on the exchange rate by acknowledging the CODEL,s 
interest in detailed points outlined by PBOC Governor Zhou in 
their earlier meeting and said that at an appropriate future 
time, the points outlined by Governor Zhou will be published. 
 
The U.S. Trade Deficit with China:  Production and Surplus 
Reallocations 
 
¶8.  (SBU)  Wu Yi turned to the U.S. trade deficit with China, 
noting the CODEL,s great interest in the topic and the 
proposal she attributed to Senator Schumer alone for a 27.5 
percent tariff on goods imported by the United States from 
China due to an unfair Chinese exchange rate.  Many 
complicated causes contribute to the trade imbalance, and the 
propaganda heard in the United States is not consistent with 
the reality in China.  The trade deficit is very much related 
to industrial reallocation against the backdrop of 
globalization.  Different economic structures and different 
levels of economic development between China and the United 
States also are important contributing factors.  In sum, the 
trade imbalance is structural, complementary and not a 
competitive deficit.  She encouraged the professional staff 
membrs in the CODEL to note the statistics she was bout to 
enumerate. 
 
¶9.  (SBU)  First, th U.S. trade deficit with China is a 
matter ofreallocation.  In the period from 1999 through 
2005, foreign-invested enterprises in China amounted to 
228,000 (as translated by the Vice Prmier,s interpreter). 
Those 228,000 enterprises invested $355.1 billion in China. 
Upon further analysis of these foreign-invested enterprises, 
China had determined that 73 percent came from Japan, South 
Korea, Taiwan, Southeast Asian countries and others who 
already had large trade surpluses with the United States. 
Among the 228,000 foreign-invested enterprises, more than 77 
percent are export-oriented.  In 2005, 83 percent of China,s 
trade surplus was attributable to foreign-invested 
enterprises in China. 
 
¶10.  (SBU)  The U.S. trade deficit with China in 1999 was 
$22.4 billion, Wu Yi continued.  (Note:  The Vice Premier,s 
trade data is China,s data; USG trade data shows 
significantly higher trade deficits in the years she cited. 
End note.)  By 2005, that had jumped to $110 billion.  Before 
1993, however, China had always run a trade deficit with the 
United States, but that situation had reversed itself in 
¶1993.  China,s trade surplus with the United States comes 
from companies and countries that had earlier surpluses with 
the United States but those surpluses have now been 
reallocated to China.  In the 1999-2005 period during which 
China,s trade surplus with the United States had expanded, 
the trade imbalances between Southeast Asian nations and the 
United States had narrowed.  Wu Yi asserted that the U.S. 
global trade deficit had decreased six percent in this same 
recent six-year period.  She also claimed that the U.S. trade 
deficit with the rest of the world had increased from 43 
percent in 1999 to 57 percent in 2005.  The main cause for 
the rising U.S. trade deficit is not China but lies with 
other important trade partners of the United States. 
 
¶11.  (SBU)  Wu Yi next cited a passage that she said came 
from the 2005 Economic Report of the President and attributed 
much of the U.S. trade deficit with China to manufacturing 
operations established in China by Asian companies who then 
shipped to the United States, moving trade surpluses to China 
while their home country surpluses with the United States 
decreased.  This cited passage shows that the Economic Report 
of the President finds that China is not the main cause of 
the trade imbalance, she said. 
 
¶12.  (SBU)  U.S. companies have more than 40,000 investment 
projects in China.  Many U.S. multinational companies have 
established joint ventures and wholly-owned foreign 
enterprises in China.  They sell goods in China, replacing 
goods formerly imported from the United States to sell in 
China.  They also sell to the U.S. market.  The Vice Premier 
thinks that this business pattern is a major reason for the 
increasing U.S. trade deficit with China and another example 
that reallocation of production is a major cause for the 
trade imbalance between China and the United States. 
 
The Trade Deficit:  Complementarity of Economies 
 
¶13.  (SBU)  The U.S. and Chinese economies are cut out for 
each other, the Vice Premier stated, and the U.S. trade 
deficit with China is a complementary deficit.  Many types of 
Chinese-made goods imported by the United States are products 
that the United States no longer produces, such as 
labor-intensive toys, apparel and shoes.  So these Chinese 
manufacturers are not competing with U.S. manufacturers. 
Even if the United States were to cease importing such goods 
from China, the United States would have to look to other 
foreign suppliers to meet U.S. demand.  U.S. measures to 
restrict imports from China would not solve the trade 
imbalance matter, and would cause indignation among U.S. 
consumers. 
 
The Trade Deficit:  Those U.S. Export Controls on High-Tech 
Goods 
 
¶14.  (SBU)  U.S. export controls are another cause of the 
U.S. trade deficit.  U.S. export controls are the biggest 
uncertainties facing Chinese efforts to expand high-tech 
imports from the United States.  While the ratio of high-tech 
imports in China,s imports from the rest of the world are 
growing, as are the absolute volumes of high-tech imports, 
the ratio of high-tech imports from the United States to 
total imports from the United States is decreasing.  In 2005, 
China,s imported more than $200 billion of high-tech goods 
from all countries, but the United States supplied only 8.1 
percent of those goods.  That was 8 percent lower than in 
¶2001.  While the United States had been the second largest 
source of Chinese high-tech imports in 2001, the United 
States had slipped to sixth place in 2005.  The increase in 
value of U.S. high-tech exports to China has been far less 
than growth rates achieved by the European Union, Japan and 
South Korea.  The United States is the largest developed 
country in the world.  In the structure of international 
trade, high technology is where the United States is most 
competitive.  China is a WTO member and its economy is open 
to the world.  China,s imports from all countries amounted 
to $600 billion in 2005, and China does not discriminate when 
importing.  The Vice Premier expressed surprise that the 
United States is being left behind by the European Union, 
Japan and South Korea with respect to high-tech exports to 
China.  She urged the United States to look internally for 
causes and solutions. 
 
The Trade Imbalance:  Important Issue for Chinese Leaders, Too 
 
¶15.  (SBU)  China attaches great importance to the trade 
imbalance.  President Hu Jintao and Premier Wen Jiabao have 
indicated to President Bush in earlier meetings their hopes 
to increase Chinese imports from the United States.  Premier 
Wen made a three-point proposal to President Bush on this 
very matter.  The Chinese people are a people that keep their 
word.  China has taken important measures to promote trade 
with the United States, and those measures are now beginning 
to pay off. 
 
USTR Testimony:  China Is America,s Fastest Growing Export 
Market 
 
¶16.  (SBU)  Wu Yi cited USTR,s February 15 testimony to a 
House of Representatives Committee.  In 2005, U.S. exports to 
China had increased 20 percent, marking the third year in a 
row that U.S. exports to China had increased 20 percent or 
more.  USTR also said that exports to China had increased 118 
percent since 2001, the year in which China had acceded to 
the World Trade Organization.  China is the fastest growing 
export market for the United States, and is now the fourth 
largest export market for the American goods and services. 
 
Imminent Chinese Trade and Investment Missions to the United 
States 
 
¶17.  (SBU)  China plans to promote trade and investment with 
the United States in 2006.  Chinese businesses and 
entrepreneurs are being encouraged to travel to the United 
States to look for business cooperation opportunities. 
During her upcoming trip to the United States for the April 
11 meeting of the Joint Commission on Commerce and Trade, Wu 
Yi said, she will be responsible for business delegations 
amounting to 150 Chinese entrepreneurs.  The delegation 
members will sign contracts and cooperation agreements as 
they look for trade opportunities, consider U.S. products and 
pursue investment opportunities.  Business delegations will 
visit locations in California, Tennessee, South Carolina, 
Minnesota, New York, Georgia, Illinois, Washington State and 
Washington, DC.  Particular interests of the delegations will 
include soybeans, cotton, computer software, aircraft, 
automotive parts and machinery.  According to China,s trade 
promotion plans for 2006, 90 functions to promote Sino-U.S. 
trade will be conducted, with more than 30 of them scheduled 
for locations in the United States.  These events will help 
U.S. small and medium-sized enterprises to learn about 
opportunities in the China market.  China is sincere in 
making great efforts to promote imports from the United 
States. 
 
¶18.  (SBU)  The United States should express its sincerity by 
undertaking measures to settle the trade imbalance, the Vice 
Premier said.  Unilateral Chinese measures will not be enough 
to resolve the trade imbalance.  The United States should 
ease export controls that affect shipments to China and ease 
restrictions on visas for Chinese entrepreneurs wishing to 
travel to the United States to purchase goods. 
 
IPR:  I Am in Charge; Increased Enforcement Efforts 
 
¶19.  (SBU)  The Vice Premier said IPR protection was another 
concern for the CODEL.  IPR protection is also an issue for 
the Chinese Government.  Protection of intellectual property 
and the interests of IP rights owners is important not only 
in the international arena but is also closely related to 
improvement of China,s socialist market economy and China,s 
own economic development.  China and the United States have 
closely related interests with respect to IPR.  Over the last 
twenty-some years, China has implemented a nearly complete 
legal system to protect IPR and has acceded to many 
international agreements relating to IPR.  Domestically, 
China has implemented administrative and judicial measures to 
protect IPR. 
 
¶20.  (SBU)  The State Council formed a Working Group on IPR 
Protection, which the Vice Premier leads.  The Working 
Group,s mission is to enhance the leadership and 
coordination of the Central Government in protecting IPR in 
China.  As leader of the Working Group, Wu Yi regularly meets 
with business representatives in China to discuss IPR 
concerns. 
 
¶21.  (SBU)  Chinese law enforcement agencies have taken a 
series of important and effective measures to protect IPR. 
Criminal penalties for IPR violations have been strengthened. 
 At the end of 2004, the Supreme People,s Court and the 
Supreme People,s Procuratorate issued a Judicial 
Interpretation that has been implemented.  The Judicial 
Interpretation lowered the threshold for criminal punishment 
of IPR violations.  In 2005, the applicability of the 
Judicial Interpretation was expanded to include violations 
involving audio-visual products.  The Ministry of Public 
Security and administrative enforcement organizations have 
set up effective mechanisms to fight IPR violations.  Several 
special enforcement campaigns have been conducted to 
specially target trademark and copyright protection concerns. 
 By the end of 2005, all Chinese Government agencies were 
using authentic copyrighted computer software. 
 
¶22.  (SBU)  At the sixteenth JCCT meeting (July 2005), China 
and the United States agreed to enhance cooperation on 
cracking down on IPR violations.  Four mechanisms were 
agreed.  The Chinese Government attaches great importance to 
education and training on IPR protection.  For example, 
Beijing had convened Vice Governors from all the provinces 
for a dedicated two-week course on IPR issues.  Many other 
IPR publicity campaigns have been conducted in China.  Public 
education on IPR matters include a national IPR week around 
World Intellectual Property Day (April 26).  IPR subjects 
have been incorporated into Chinese educational curricula. 
In 2006, China will implement stronger IPR enforcement 
efforts.  Legislation and regulations will be enacted. 
International cooperation on IPR matters will also be 
strengthened. 
 
IPR:  Historic First National IPR Action Plan 
 
¶23.  (SBU) China has just weeks ago published its first-ever 
national IPR Action Plan.  Too long to summarize in this 
brief exchange with the Senators, the Vice Premier presented 
translated documents about the Action Plan to her visitors. 
 
Specialized IPR Tribunals Coming 
 
¶24.  (SBU)  The Supreme People,s Court has informed courts 
at all levels to establish special IPR tribunals to try IPR 
violators.  This will enhance judicial organs, abilities to 
crack down on IPR violations. 
 
¶25.  (SBU)  Within the next three years, China will establish 
50 IPR information centers in 50 cities throughout the 
country to take complaints about IPR protection matters.  As 
promised at last year,s JCCT meeting, China has begun to 
place IPR officials in diplomatic missions overseas.  The 
first Chinese IPR Ombudsman has joined the Chinese Embassy in 
Washington.  His job is to enhance communications with the 
U.S. business community, especially small and medium-sized 
enterprises, and inform them about how to protect their IPR 
in China. 
 
WIPO Internet Treaties 
 
¶26.  (SBU)  The relevant departments have stepped up their 
efforts to prepare the legislative package required for 
approval of Chinese accession to the WIPO Internet Treaties 
by the National People,s Congress. 
 
¶27.  (SBU)  The Ministry of Commerce and other departments 
are working closely to protect IPR at trade fairs in China 
under a special campaign known as the Azure Sky program. 
 
More IPR Enforcement Data Imminent! 
 
¶28.  (SBU)  By the end of March, the Ministry of Public 
Security and National Copyright Administration of China will 
publish their achievements in recent specialized campaigns 
against IPR violators in China.  Law enforcement transparency 
will be enhanced in the coming year.  The Central Government 
is encouraging purchase of authentic software by Chinese 
enterprises and individuals.  Civil law enforcement of IPR 
matters will also be enhanced in the coming year. 
 
At April JCCT, Wu Yi Announcements on IPR 
 
¶29.  (SBU)  The Vice Premier said at the seventeenth JCCT 
meeting on April 11, she will personally introduce the 
measures to improve IPR protection and enforcement that China 
has taken or is taking.  It is only fair to say that the 
Chinese Government,s attitude on IPR protection is very 
firm.  Anyone can see China,s increased efforts to protect 
IPR. 
RANDT