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TO RUEHC/SECSTATE WASHDC IMMEDIATE 3731
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INFO RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS E F T O SECTION 01 OF 05 BEIJING 000264 
 
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SENSITIVE 
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STATE ALSO FOR OES/WATSON AND DEROSA-JOYNT 
STATE PASS CEQ CONNAUGHTON 
STATE PASS CEA FOR BLOCK, SLAUGHTER 
STATE PASS USTR FOR STRATFORD, ALTBACH, WINTERS, CELICO 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN 
FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRM FOR DAGES 
NSC FOR RHUNTER/JSCHRIER/KTONG 
TREASURY FOR OASIA/INA DOHNER/HAARSAGER/BAKER/CUSHMAN 
TREASURY FOR TAIYA SMITH 
DOE FOR INTERNATIONAL/PUMPHREY AND GEBERT 
EPA FOR INTERNATIONAL/AYRES, FIDLER, MCASKILL 
HHS FOR STEIGER, ELVANDER AND BHAT 
LABOR FOR ILAB 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD PREL CVIS SENV ENRG CH
SUBJECT: SED SESSION FOUR:  PROMOTING TRADE AND INVESTMENT 
AND REMOVING BARRIERS 
 
REF: A. BEIJING 259 
 
     ¶B. BEIJING 262 
     ¶C. BEIJING 263 
 
¶1. (SBU) Summary:  In the December 14 Strategic Economic 
Dialogue (SED) session on promoting trade and investment, 
Secretary of Commerce Carlos Gutierrez described the mutual 
 
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benefits of United States-China trade, urged China to open 
further its services market, and underscored the need to 
avoid protectionism.  Commerce Minister Bo Xilai challenged 
United States concerns about the trade deficit, market access 
and IPR protection and raised Chinese concerns about USG 
restrictions on technology exports and designation of China 
as a non-market economy (NME).  United States Trade 
Representative (USTR) Ambassador Schwab emphasized the 
importance of regulatory transparency.  People's Bank of 
China Governor Zhou explained Chinese steps to open its 
financial sector, attributing remaining restrictions to its 
desire to maintain financial stability.  Senior Vice Foreign 
Minister Yang Jiechi advocated liberalizing United States' 
visa procedures to promote tourism and business exchanges. 
Secretary of Treasury Henry Paulson emphasized the importance 
 
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of opening the Chinese market to foreign investment.  End 
Summary. 
 
WU YI:  ADVOCATING MUTUAL UNDERSTANDING AND COOPERATION 
--------------------- 
 
¶2. (SBU) Vice Premier Wu Yi started the fourth session of the 
Strategic Economic Dialogue (SED) by recommending dealing 
with inevitable trade frictions by engaging in a dialogue 
from a long-term, non-political perspective, and increasing 
mutual understanding and cooperation. 
 
SECRETARY GUTIERREZ: U.S. SERVICE EXPORTS TO CHINA SHOULD 
 
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RISE 
--------------------- 
 
¶3. (SBU) Commerce Secretary Carlos Gutierrez said we must 
improve the composition of United States exports to China by 
dramatically increasing exports of services, noting that we 
will not narrow the trade deficit until we have done so.  He 
urged China to further open its services markets to foreign 
participation. 
 
¶4. (SBU) The trend toward protectionism in both countries 
must be avoided, Secretary Gutierrez declared.  To do so, 
China needs to become more of a market economy through 
enlarging the private sector, increasing transparency and 
strengthening IPR enforcement.  Currently, 75 percent of 
IPR-related seizures by United States Customs originate from 
China and Hong Kong.  To enhance our mutual understanding, we 
should discuss the visa reciprocity issue with a view to 
increasing travel of our citizens between our countries.  The 
United States also wants to re-open discussions on civil 
aviation to increase flights to and from China. 
 
MINISTER BO: PAINTING A ROSY PICTURE OF TRADE RELATIONS 
------------------ 
 
¶5. (SBU) Commerce Minister Bo Xiai predicted that China 
would surpass Japan as the United States' most important 
trading partner in Asia in the next year or two and 
speculated that in ten years' time, we may become each 
other's largest trading partner. 
 
¶6. (SBU) Minister Bo challenged three United States concerns 
about its trade with China.  First, while acknowledging that 
the United States trade deficit is large and growing, Bo 
 
BEIJING 00000264  002 OF 005 
 
 
asserted that, taking into account lower costs for United 
States consumers and the profits of United States companies 
in China, both sides benefit equally.  The deficit itself is 
caused mainly by a shift in the assembly of goods from Japan, 
South Korea and Taiwan to China, he argued.  Second, China 
has made great efforts to protect intellectual property 
rights (IPR), but needs more time as its legal and public 
education systems lag behind those of more developed 
economies.  China will continue to increase IPR protections 
in order to protect its own industries, not just to respond 
to foreign criticisms.  Third, China had fully met, and even 
exceeded, its WTO accession commitments.  Bo noted that 
United States exports to China have increased dramatically, 
nearly 28 percent annually, since China's WTO accession in 
December 2001. 
 
¶7. (SBU) Minister Bo urged the United States to lift controls 
on high-technology exports and to rescind China's designation 
as a non-market economy.  According to Bo, over the past five 
years, the share of United States high-tech products as a 
percentage of overall Chinese high-tech imports declined from 
eighteen to eight percent.  Bo encouraged the United States 
to rescind China's NME designation and expressed concern at 
the United States Commerce Department's acceptance of a 
countervailing duty petition.  Noting that the United States' 
six criteria for market economy status are not based on WTO 
rules, Minister Bo said China would not change merely to meet 
Washington's "subjective" standards. 
 
BENEFITS OF INCREASED TRADE, INVESTMENT, TRANSPARENCY 
-------------------- 
 
¶8. (SBU) USTR Ambassador Susan Schwab emphasized the 
importance of transparency to bilateral trade and China's own 
development.  The SED is well suited to tackle trade and 
investment issues, because many of these problems lie outside 
the traditional jurisdictions of China's Ministry of Commerce 
and USTR/USDOC.  Deliverables are also important for 
propelling the dialogue, she underscored.  Many United States 
companies are concerned about the lack of transparency in 
China's reforms of its postal service, as well as China's 
apparent intention to give China Post a monopoly, Ambassador 
Schwab said.  She warned of the pitfalls of attempting to 
pick winners and control competition.  The United States' 
experience with postal reforms proves the value of 
transparency and competition.  United States regulatory 
changes allowed competition in the express package service 
sector, which created a new global market and at the same 
time resulted in a more competitive United States Postal 
Service.  Ambassador Schwab emphasized that that the Doha 
Round provides an opportunity for China and the United States 
to show leadership in the world economy, noting that no two 
countries have more at stake in the world trading system. 
 
¶9. (SBU) Matthew Slaughter of the Council of Economic 
Advisers stressed the benefits of increased trade and 
investment, especially in services.  Slaughter noted that 
companies engaged in international trade tend to be the most 
productive and best paying companies.  Today, five percent of 
the American workforce is employed by foreign companies, but 
these companies account for 11 percent of GDP and 15 percent 
of private sector research and development. 
 
CHINA'S EFFORTS IN FINANCIAL SECTOR, TECHNICAL STANDARDS 
-------------------- 
 
¶10. (SBU) People's Bank of China (PBOC) Governor Zhou 
Xiaochuan explained steps China has taken to open its 
financial sector, while attributing remaining restrictions to 
 
BEIJING 00000264  003 OF 005 
 
 
the cautious approach adopted following the 1997-98 Asian 
financial crisis.  China has fully lived up to its WTO 
commitments.  China has lifted many restrictions on both 
incoming and outgoing foreign direct and portfolio 
investment.  Nevertheless, negotiations on China's WTO 
accession took place in the shadow of the Asian financial 
crisis.  Given the weak state of Chinese banks and capital 
markets at the time, China's financial sector was not opened 
that widely to foreigners.  This is a legacy we are still 
dealing with today, Zhou explained. 
 
¶11. (SBU) Administrator of the General Administration of 
Quality Supervision, Inspection and Quarantine (AQSIQ) Li 
Changjiang outlined steps China has taken to harmonize and 
increase the transparency of its technical standards.  Li 
also advocated increased exchange of information on 
standards, asserting that Chinese companies have suffered USD 
22 billion in losses since 2001 as a result of technical 
barriers to trade.  Currently, 46 percent of China's 
standards conform to international norms; the goal is to 
raise that figure to 85 percent in 2010, Minister Li stated. 
 
VISAS, PEOPLE-TO-PEOPLE EXCHANGES 
------------------ 
 
¶12. (SBU) Senior Vice Foreign Minister Yang Jiechi advocated 
changes to United States visa procedures to promote tourism 
and business travel.  China provides many "conveniences" to 
American visa applicants and has a high issuance rate, but 
the United States' visa refusal rate is quite high and its 
visa procedures complicated and time-consuming, Yang claimed. 
 As a result, many Chinese businessmen travel to Japan and 
Europe instead of the United States and many Chinese students 
opt to study instead in the United Kingdom, Australia and New 
Zealand.  Out of the 31 million Chinese who traveled overseas 
in 2005, less than two percent traveled to the United States, 
Yang stated.  He made three specific proposals:  1) eliminate 
the visa interview requirement for government officials at 
the Vice Minister-level and above; 2) further open up the 
American tourist market to Chinese visitors; and 3) reduce 
the amount of time required for security checks for visa 
applicants in science and technology fields. 
 
¶13. (SBU) In response, Assistant Secretary of Transportation 
Andrew Steinberg explained steps the United States has taken 
to streamline the visa process, such as instituting internet 
visa applications and electronic clearances and appointments 
for tour groups.  There has been a 33 percent increase in the 
number of Chinese visitors to the United States, he stated. 
A/S Steinberg highlighted that developing bilateral air 
services would reduce the bilateral trade imbalance by 
increasing exports of United States services (particularly 
tourism).  Further liberalization in air services would also 
spur development of the air cargo industry. 
 
MOFCOM MINISTER BO TAKES ISSUE WITH USG POSITIONS 
------------------------ 
 
¶14. (SBU) Commerce Minister Bo Xilai's lengthy rebuttal to 
the United States statements included the following points: 
 
-- China is willing to work with the United States to 
increase trade in services, but China's service sector is 
already largely open.  At the end of 2005, there were more 
than 270,000 foreign invested enterprises in China.  The 
United States is strong in the services sector, with a USD 
2.5 billion bilateral surplus in services trade, but China 
still needs time to develop its services sector. 
 
 
BEIJING 00000264  004 OF 005 
 
 
-- China has "scrupulously" implemented its WTO transparency 
commitments.  He complained that, on barriers to agricultural 
trade and "national security" barriers to foreign investment, 
the United States is not transparent. 
 
-- Secretary Gutierrez's figures regarding the percentage of 
United States Customs IPR-related seizures originating in 
China and Hong Kong exaggerate their economic impact.  While 
the numbers are high, their value is low.  According to 2005 
United Sates Customs figures, only USD 64 million worth of 
products was seized, out of a total of USD 163 billion 
Chinese exports to the United States. 
 
-- The market is not a panacea.  "Market failures" occur in 
areas such as IPR enforcement, worker safety, environmental 
protection and production capacity.  Regarding China's steel 
industry, production thresholds are important both for 
environmental protection and prevention of excess capacity. 
 
-- United States criticizes merger and acquisition obstacles 
in China, yet the Lenovo and CNOOC acquisition cases 
triggered "national security" concerns in the United States. 
 
-- Because China has not been granted &Market Economy 
Status8 in the United States, Chinese companies are required 
to pay a higher duty in dumping cases, which is 
discriminatory.  Subjecting Chinese companies to 
counter-vailing duties would be a "double penalty."  The 
United States should use international standards in 
determining whether or not China is a market economy. 
 
RESPONSES FROM SECRETARIES GUTIERREZ AND PAULSON 
--------------------------------------------- ---- 
 
¶15. (SBU) Secretary Gutierrez stated that the United States 
is ready to discuss United States high-tech export controls 
but noted that Congressional approval would be required for 
any changes.  On IPR seizures, Secretary Gutierrez said he is 
prepared to compare figures.  The Secretary welcomed Bo's 
statement that China is willing to expand service imports. 
Turning to the acceptance of a petition for countervailing 
duties, Secretary Gutierrez asserted that the USG process is 
transparent and that we will communicate with the Chinese 
side so as to avoid any surprises.  Secretary Gutierrez also 
said he was willing to discuss further the Market Economy 
Status issue. 
 
¶16. (SBU) Treasury Secretary Paulson responded by emphasizing 
the importance of opening the Chinese energy market, 
including Chinese energy companies, to foreign investment. 
Secetary Paulson reminded Bo that the Lenovo deal as 
approved and has been successful.  The CNOOC experience in 
its attempted acquisition of Unocal, in contrast, was highly 
unusual.  It was a contested deal, in which Chevron had 
already signed a contract, so it was to be expected that the 
case would be politically sensitive.  China cannot claim it 
is open to services if foreign firms can only make small 
minority investments in Chinese companies, Secretary Paulson 
stated.  Advocating the removal of investment caps, the 
Secretary said he does not know of a single joint-venture 
 
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bank that has been globally competitive.  Opening China to 
investment and services would not only help the trade deficit 
but would also help the entire Chinese economy to grow, 
Secretary Paulson emphasized. 
 
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PARTICIPANTS 
------------ 
 
¶17. (SBU) Participants in SED Session IV: 
 
BEIJING 00000264  005 OF 005 
 
 
 
United States Delegation 
 
--Henry Paulson, Secretary of Treasury 
--Clark Randt, Jr., United States Ambassador to China 
--Michael Leavitt, Secretary of Health and Human Services 
--Samuel Bodman, Secretary of Energy 
--Carlos Gutierrez, Secretary of Commerce 
--Elaine Chao, Secretary of Labor 
--Susan Schwab, United States Trade Representative 
--Stephen Johnson, Administrator of the Environmental 
            Protection Agency 
--Benjamin Bernanke, Chairman of the Federal Reserve 
--James Lambright, Chairman and President of Ex-Im Bank 
--Daniel Sullivan, Assistant Secretary, Department of State 
--Andrew Steinberg, Assistant Secretary, Department of 
Transportation 
--Matthew Slaughter, Member of the Council of Economic 
Advisors 
 
Chinese Delegation 
 
--Wu Yi, Vice Premier 
--Jin Renqing, Minister of Finance 
--Ma Kai, Chairman of National Development and Reform 
      Commission 
--Xu Guanhua, Minister of Science and Technology 
--Tian Chengping, Minister of Labor and Social Security 
--Liu Zhijun, Minister of Railways 
--Li Shenglin, Minister of Communications 
--Wang Xudong, Minister of Information and Industry 
--Bo Xilai, Minister of Commerce 
--Gao Qiang, Minster of Health 
--Zhou Xiaochuan, Governor of People's Bank of China 
--Li Changjiang, Administrator of General Administration of 
      Quality Supervision, Inspection, and Quarantine 
--Zhou Shengxian, Administrator of State Environmental 
      Protection Administration 
--Zhou Wenxhong, Chinese Ambassador to the United States 
--Xu Shaoshi, Deputy Secretary-General, State Council 
--Yang Jiechi, Vice Minister, Ministry of Foreign Affairs 
--Zhang Xiaoqiang, Vice Chairman, National Development and 
Reform Commission 
--Li Yong, Vice Minister, Ministry of Finance 
--Yi Xiaozhun, Vice Minister, Ministry of Commerce 
--Hu Xiaolian, Vice Governor, People's Bank of China 
--Li Ruogu, Chairman of China Export-Import Bank 
SEDNEY