 My name is Matthew Goodman. I hold the William Simon Chair in Political Economy here at CSIS. Delighted to have you with us. Nice, big crowd. It's always nice to see at a security conference of full room on economic issues that warms the cockles of my heart. So there are, as a moderator, panels here at CSIS. There are two kinds of panels. They're hard panels and they're easy panels. And it sort of reminds me of when I take my teenage boys to Funland in Rehoboth. There are machines where you put in quarter, after quarter, after quarter, and you can't win any tickets or fries, like that claw machine. Forget that. You waste a lot of money. And there are other machines that my kids have figured out. You put in one quarter and you get lots and lots of tickets. And this is definitely one of those panels where I only need to put in one quarter and wind these guys up and this is going to be easy. So we're here to talk about US-China economic relations, version 2.0. And this is obviously an interesting time to be discussing these issues because we have, in what, four days the big, long-awaited third plenum of the Chinese Communist Party's Central Committee. And lots of anticipation of that. I'm sure we're going to tell you exactly what's going to happen at that event. But seriously, we will, obviously, touch on that, hard to avoid. But I think we want to try to give this a little context as well and talk about other aspects of US-China economic relations. So we have a terrific panel to do this with us. And I'll quickly introduce them, although I think they're all well known to you and you have biopacks. To my far right, your left is Ambassador Stapleton Roy, a former US ambassador to China, Indonesia, Singapore, a number of other places that he served as a Foreign Service Officer for many years, one of the most distinguished scholars on China that there is. And so we're just delighted to have Stapleton with us to give us an overall perspective on these issues and hopefully a little bit of a thought on the third plenum as well. To my immediate right is Chris Johnson, who I think most of you know is the CSIS Freeman Chair in China Studies here at CSIS, a longtime analyst of China's leadership in particular at the CIA here in Washington for a long time. And he joined us at CSIS about a year ago and I think has been a very well known figure to most of you here. So I'm delighted to have Chris with us. Not to confuse things, but to my left, I have not only the former Freeman Chair in China Studies here at CSIS, but a gentleman who happens to be named Charles Freeman, no connection, no relationship at all. Charles is now Vice President at the Rock Creek Global Advisors, where he focuses on international policy issues for particular focus on Asia. Charles was Assistant USTR for China in the Bush administration, where I had the pleasure of working with him. And it's terrific to have Charles with us and back here at CSIS in our new abode. And then to my far left, your right is Scott Miller, who is CSIS's Shoal Chair in international business. Scott, again, is I think well known to anybody who spends any time at CSIS, although he's only been with us for about a year, but he had appeared at CSIS events before that in his long career at Procter & Gamble, where he was in charge of global public policy issues and involved in many of the key US-China trade issues, including their accession to WTO. So we have about the perfect panel to give a wide perspective on these issues. And let me kick it off by asking state to give us some perspective on the role of economics in the US-China relationship. So if you were a Martian who dropped down onto Earth, depending on where you set your time machine, if it was 35 years ago, not much going on, maybe a few ping-pong balls being sold between the US and China, 15 years ago, tremendous activity, a lot of US investment in China, again, effort to get China into the WTO and was the focus of US-China economic relations. In the last three to five years, you'd see some of that activity continuing, but a little bit more scratchiness in the economic relationship with some business concern about the investment climate there, about intellectual property protection, cyber security issues, and a range of other currency issues. And so I guess I'd like to start by asking you sort of what role economics has played in this relationship over time, how it's changed, and where you think we are today. I'll try to be brief. We're here really to talk economics, but let me provide a framework as to why economics is so important for this relationship. This is a sophisticated audience, and I think most of you are aware that the United States and China discovered common ground in the early 70s because of the Soviet threat. And when the Soviet threat was vastly diminished with the unraveling of the Soviet Union, we had real difficulty re-establishing a basis for our relationship with China. Partly because the image of China and the United States had been so badly impacted by the television coverage of the events around Tiananmen in 1988, 89, which occurred roughly in the timeframe of the unraveling of the Soviet Union. So we had a double whammy, no strategic threat to bring us together, and strong negative reactions in the United States due to developments in China. We have now recovered our fleet, and we've discovered that the only way we can handle our relationship with China is by treating it as a relationship between two major powers, but the dynamics are changing. Over the last 30-some years, China's economy has more than 15 times increased in size, and you have the dynamic of a rising power and an established power. Now, the relationship between the United States and China, as virtually every bilateral relationship in the world, is a mixture of cooperation and competition. And some people think the competitive factors are already beginning to dominate the bilateral relationship, and this is a disturbing trend. In fact, I think that's wrong. And I'll explain why very briefly in a moment. The cause of concern is if the competitive factors dominate the relationship, then we're going to be in the classic case of the rising power and the established power, and that leads to bad outcomes. In the case of China, I don't think it necessarily leads to conflict. We have the same problem that kept us from direct conflict with Soviet Union. Namely, we're both nuclear powers that have the ability to retaliate against the homeland of the other side. That's an enormous deterrent to getting into direct conflict between us. But the fact of the matter is, hostile rivalry will have a very negative impact on East Asia. Now, why do I disagree that the competitive factors in the relationship are the dominant? The reason, basically, is trade. Trade, bilateral trade. Both the bilateral trade is competitive. Bilateral trade is cooperative. Our trade with China is running over $500 billion a year. That's over 100 times higher than our bilateral trade with Soviet Union at any point during the Cold War. So in other words, we're not looking at China as a hostile country. You trade with friendly or neutral countries. You don't trade with enemies. And our trade with China is the clearest demonstration that we do not view China as a hostile country, and our policy is designed to not have China become a hostile country. But we've had a stable military balance in the Western Pacific for basically the post-Pold War period. And that's been based on American superiority in naval and air power in the Western Pacific. Now China, with a large economy and growing ambitions, is developing a military which is challenging the U.S. superiority. And that's where the dynamic that is pushing the direction in a more troublesome competitive factor is occurring. China is developing, you know, guideable ballistic missiles that threaten our aircraft carriers if they successfully test it in the Western Pacific. We're responding with an air-sea battle concept that would involve taking out facilities on the China mainland. Whoops, we're talking rapid escalation to very dangerous situations if we go down that route. How do we stop it? The leaders have said we've got to create a new type of major power relationship that can bring these strategic competitive factors under control. I would argue that experience shows that both militaries are behaving normally. Each wants a balance that is favorable to its own country, and that's what the militaries are designed to do. So if you leave it as a military problem, we can't solve this problem. We have to treat it as a problem of grand strategy. Grand strategy brings all of the components of national power into a combination designed to achieve your policy goal. The policy goal is to bring strategic rivalry between China under policy control. At the moment it's being driven by military strategy on each side. So that's where the economic component becomes so vitally important. If we don't manage the economic, the people-to-people exchanges, the educational aspects, in other words, the totality of the relationship is clearly not a hostile one as it was with the Soviet Union during the Cold War. We have to keep it that way and to keep the economic component that involves trade and investment. Contributing, there's going to be rivalry in those areas, but there's also going to be major cooperation. So therefore, what we're going to be talking about today is a very important part of trying to create this new type of great power relationship that can stabilize the Chinese relationship, which will always include cooperation and competition, unless it goes wildly off the track. And our policy in both countries, in my judgment, is designed to not let that happen. So you see the economic relationship in that context as being almost entirely or largely positive for the relationship, but there is an argument that familiarity breeds contempt and if you're closer in an economic sense, I mean, I think the people-to-people stuff is almost unadorned positive, but in the economic realm, there is a risk of tension created that wouldn't have been there otherwise. And I wonder whether you've seen times when the economic relationship has actually made the strategic relationship more challenging over the time you've been there and whether we may be- Let me say two examples, Matt, because this is an important thing. I came back from four years of the Soviet Union in the early 70s, and while at the National War College, visited Canada. And the briefing by our embassy up there made Canada appear like a hostile country. We had the most egregious trade disputes with... They involved fishery issues, they involved timber issues, and we were at longer heads with them. And some of you may recall our difficulties with Japan, a close ally of the United States, and we were really bashing Japan in the early 1980s. So you can have strong trade disputes within a basically stable cooperative relationship. That's worth bearing in mind because we're gonna have strong trade disputes with China, and we're gonna have disputes in many areas affecting the economic relationship. But our goal is to create an overall relationship with China that can contain these types of difficulties and not let them push the relationship in an unmanageably hostile direction. Okay, thanks. I may come back to you on, you've mentioned in passing the impact of a hostile relationship in this area on the rest of the region, and I wanna come back to that, but let me turn to Chris here first to bring him into the conversation. So Chris, a lot of the conversation about China, including the safe presentation, is about trade and investment relations, and that's obviously important. As a former treasury guy, I think of this first in sort of macroeconomic terms. And as you know, the US government has been insisting that China needs to shift to a new model of growth that's more domestic demand-led, consumption-led, rather than export and investment-led. To do that is gonna require them to do a bunch of very big, challenging things, like getting more people into the cities because urban consumers tend to spend more than rural consumers to do financial reform, to end financial repression, give people a better return and more efficiently allocate capital to make the marketplace more competitive generally, which means taking on the SOEs. All these things are very difficult and have some entrenched vested interests and a lot of risk associated with moving unless you do it in an appropriately sequenced way. So I guess the first question is, or there's an A and a B question, is do they see things this way? Is this just the US perspective on these issues or does China really fundamentally understand that it needs to make this kind of a shift and why? And can they pull this off? Well, let's start with the easier question, which is A. Actually, my first reaction to what you said, Matt, was you mentioned that the US is insisting that China do these things. Well, the Chinese leadership is also insisting that they do these things, that they rebalance their economy internally and move all in the direction that you're suggesting. Obviously, our views of what they need to do in their own are somewhat different, but the general policy direction is similar. They know they have to do these things. And I think what's been particularly intriguing on that front is to watch really even just how within the last year or two, certainly since the new leadership team has come to power, that I think you have a much broader consensus across the top leadership now than you have in years past that the current economic model is no longer functioning and in fact that the gears are even grinding on it. And I think that the big kind of so what that gave them that impression early on was the way in which the policies adopted after the global financial crisis, primarily the massive stimulus program, led to almost no GDP bounce or very little, not certainly not what they would have expected. And all of them of course would remember well after the 1997 Asian financial crisis where they poured in a much smaller amount of money and got a much bigger return. So my sense is that there's a lot of frustration with how all of this just kind of disappeared or melted away into the system, especially at the local level. And that's one of the key issues that they're facing. So I think there's a pretty solid consensus across the bullet bureau maybe with a few holdouts that they need to move in this direction. The trick is how do you get from A to B and by what means and how do you construct the blueprint that you're going to activate going forward? And that's what the debate now is really fundamentally circling around. Whether or not they can do it, I think is an impossible question. We're just gonna have to watch and see but do they have the intent to do it I think is actually the more important question. And I think the answer to that one is yes for several reasons. I think we've seen, for example, the new leadership team has come in very strongly with this strong reformist rhetoric. So you have Xi Jinping saying empty talk harms the nation and you have the new Premier Li Keqiang saying reform is like a boat against the current. It must move forward or it will move backward. These sort of very kind of forward leaning statements. And they might sound kind of corny to a Western audience but they're very meaningful inside their system and convey a lot of meaning. I also found it very interesting and I think in part because as the new leadership team came in and started to settle into place, there was some dispute among the top leaders over exactly what they should be doing and how they should proceed. So in the absence of a consensus, they always want to function on a consensus when they can, they interestingly spent a lot of time implicitly and in some cases explicitly criticizing the previous administration, the Hu Jintao administration for failing to do anything basically in its last 10 years. That's fine, you can do that but of course it raises expectations about what you're going to do. And I really do think that Xi and Li are fundamentally aware that their credibility is on the line here. They have promised economic reform but so far all Xi Jinping has really delivered is an anti-corruption campaign and a very deep ideological and political retrenchment. So I think they run the risk if they don't make some steps here in the very near future of being dismissed as retrograde, if not worse, not understanding the fundamental economic problems that they're facing or at least not being able to, or willing, I think it's more an issue of will to do anything about it. So that's fundamental. With that being the case, I think the new top leadership knows that they have to deliver something at the plenum that we're going to see open up next week. Exactly what that's going to look like I think is not going to be clear. Plenums tend to deliver be high on high sounding rhetoric and guidelines and this sort of thing, but low on specifics. It's interesting if you look at the last several rounds of these plenums in the key leadership cohorts of the last couple of rounds. In 1993, obviously they delivered a very specific plan at that plenum, but they didn't implement it until much later, really when they were trying to get into the World Trade Organization. If you look at the 2003 plenum, they did follow through pretty deliberately on some of their very vague proposals, but there was so little specifics to it that they couldn't create a well coordinated and overarching plan. So even though they made some progress, it wasn't coordinated and therefore it wasn't very effective. So what I'm hearing is that this leadership cohort is trying to hit for the middle, if you will, and look at a situation where they want to have fewer specifics, fewer specific proposals, but make sure guaranteed that they can deliver and implement those specific proposals. So I think things that are probably guaranteed really to be in the document that comes out of the plenum, something on financial reform. I mean, I think it's inevitable that over the next two to three years they will liberalize interest rates, they will do something with opening the capital account, they will do some kind of a partial float probably on the rem and these things are implicit. So if that's not there, a disaster has occurred in terms of the ability to achieve this consensus inside. And there you have very specific and competent and pro reform oriented people running the implementation process, right? So you have Joe Xiaochuan at the People's Bank, you have Loji Wei as the finance minister. These are all people who are very much inclined to move in that direction. So that's a good one. The bigger questions are kind of what you discussed a moment ago, which is all these things that relate at the end of the day to getting themselves out of the debt trap that they basically got themselves into since the global financial crisis. So that obviously touches on local fiscal and tax reform. Closely related to that obviously is the urbanization process and liberalizing the Hukou system or the registration permit system. And also looking I think very seriously at land reform, land use reform and more importantly, land transactions reform to allow the peasants to get more income out of the land sales and stuff like that that's going on. Those are the much harder ones. And then of course the big behemoth is the state-owned enterprises and what's gonna happen there. What's been fascinating is that I'd say up until the last few weeks, there was a broad consensus that SOE was dead. They weren't going to do anything on that substantially. And in fact, Xi Jinping effectively told President Obama that during the Sunnylands summit. It's been interesting just in the last few weeks that at least in the media, there's some floaters out there, there's some trial balloons that they might do something. I think we have to be cautious though in that what I'm reading of what they're considering, that's actually designed long-term to strengthen the SOEs, not necessarily open them more to private competition and so on. So we'll have to be mindful there. But in summary, I think they know what they need to do. There's a consensus they need to do it. Can they get there is the question. Well, we're certainly, when you talk about land reform, it reminds me of the economist cover story that I'm sure everybody's seen this week that mentions in passing that when Deng Xiaoping rolled out his reforms in 78, the actual language of the third plenum was actually pretty discouraging. And it talked about supporting the commune system and so forth. And in fact, they were underneath that, they were doing some things that prepared for much more substantial reform. And so I think we're gonna need you back to help read the tea leaves of what's actually said there and how it relates to what they might actually do. Let me ask one other question before I bring the trade guys in. I assume if I ask whether US pressure on these issues has an impact on decision-making that you're gonna say no. But in a broader sense, do they think about what the US cares about when they're making any of these decisions? I mean, one senses that Xi Jinping in the Sunnyland Summit and in the agreement to move forward on a bit and maybe even the Shanghai FGZ, that there's at least an eye to what the US and the international community are thinking about what they're doing, but maybe that's not correct. No, I think obviously they take that into account. My position on this is they do what they do primarily for their own interests, just like any country does. But you cannot have a trade relationship like they have with the United States and not factor that into account. And in fact, I think that the, especially the reform elements within the system have often seen the US pressure as valuable to helping them up to a point. Of course, there's that dividing line between pressure that is helpful and pressure that makes the leadership feel like they're looking weak if they cave. There's that problem in walking that fine line. But obviously they take these things into consideration. I mean, look at, I'm sure our colleagues will discuss in a much more detail, but look at their sudden interest in TPP and this sort of thing now. Very interesting, of course, how they use the WTO process in the late 1990s to be able to force very difficult reforms internally that I would argue just in a domestic context, they would have been unwilling to do, but the WTO process gave them the external cudgel to be able to engage in those reforms. Okay, so Charles, again, to bring in the trade guys. So they have said that they wanna do a bilateral investment treaty with the United States with a negative list approach and pre-establishment coverage, which is a big departure. They seem to have shifted their view on TPP. They've come back to the table on the information technology agreement negotiations. They wanna join the services agreement. They've done this Shanghai FDZ. There seem to be some straws in the wind that suggest that they are actually taking a more forward-leaning view of some of these international endeavors bilaterally with the US and multilaterally regionally. Do you think there is some kind of change of view going on there or is this sort of cover for things that maybe they're not gonna do as much on and they're trying to show that they're more forward-leaning? Yeah, I don't think it's cover. I think that there are the reform elements that Chris talked about are very much looking at these external tools as a means to push the economy forward. They know that there is consensus at the top that they do need to move to a domestic demand-living driven economy. They need to move in the direction of greater productivity. So they do need to have this external pressure to drive domestic reform. But also, as they look ahead and say, okay, we have, in addition to domestic consumption, GDP growth will come through productivity and innovation. That requires that they move up the value chain. And if you, you know, a lot of the traditional trade agreements are, they function on a bilateral basis. They look at, all right, I make something, I sell it to you. And all these new, the new trade arrangements are based on this very dynamic supply chain and the ability to create multiple markets within which there are increasingly fewer borders and fewer impediments to exchange of unfinished goods. That's been the story of Asian trade for the last 10 years is the creation of the supply chain out of nothing and the creation of the transfer of intermediate goods. But the OECD came out with a study that tried to, last April, that tried to look at a new way of collecting trade data, which is rather than say, okay, what's the U.S. trade deficit with China? You say, because whatever, our statistics are based on, current statistics are based on the final transformation of a good in China. Whatever that is that's sold to us comes from China. But in fact, the OECD said let's actually look at a percentage of value add in tradeable goods and actually China turned out to be the lowest value add percentage of any country. So what, I mean it's still 60 some percent, but it's a very low percentage. What China wants to and needs to do is increase that value add as a percentage of trade through other needs and if they don't engage in these external agreements, they're gonna be left behind. We don't know what's in TPP. So we don't know how ambitious it's gonna be. We hear rumors that there are sensitivities that are coming up from both sides, from all sides. And this agreement needs to be truly ambitious. If it's not ambitious enough, then frankly there's no point in China participating. They really need a very ambitious liberalized set of agreements, set of documents, TPP, TISA, the ITA too, in order to have both that external pressure and that framework that drives greater internal productivity. So, you- And we don't know what the FTZ is yet. We don't know what the free trade zone in Shanghai is actually gonna incorporate. We know a little bit, but we don't know fully what it is and how far it's gonna go. That's right. So, business has been, and I wanna ask the same question to Scott, but let me start with you, Charles, and get your take, because you've been in the trenches for a long time as well. Business has been a key bulwark of support for this relationship for the last 20 years. But recently, as I said at the beginning, there have been maybe doubts and growing doubts in the business community about the return of investment in China. They're still investing, they're still making a lot of money there, but I think at the margin, there is increasing frustration and concern about the investment climate there, about the intellectual property environment and so forth. First of all, do you agree with that? And do you think that that's a problem for the overall relationship? Certainly there's been, as Stapes says, that you can have a lot of trade disputes in a very healthy economic relationship, and as any economic relationship, trade relationship matures, you're gonna increase the number of trade disputes that you have. Looking at different ways the politicals in China use, kind of stimulate domestic reform and change, frankly, singling out the foreigners is a pretty useful exercise. It's kind of killing the chickens to scare the monkeys. It's a good line you should use, I usually use it. But I think as you're seeing a lot of the individual singling out of foreigners, really is designed to send a message throughout the larger system, whether it's on food safety, whether it's on pharmaceutical safety. Coffee prices, Starbucks prices. Starbucks prices, you know, trial by CCTV. There is that element of mobilizing xenophobia to stimulate domestic change, and I think there is some of that, and it's extremely frustrating for the business community. To the core of your question, though, are you, is the business community gonna stand up and be the water carrier for the relationship? I think there's huge frustration. And I think it's, you're gonna, if there's a status quo, and if there isn't change, if there isn't movement forward from China to join these liberalizing agreements, I think you'll see kind of a cooling of interest in from China going up to the hill and saying, no, no, no, trade with China is a good thing. But I think the chamber came out a few weeks ago with an interesting thing, which in my time I never thought I'd see in Washington, which is actually encouraging the administration to open pre-trade agreement talks with China, which would flabbergast you if you were working on the hill, but that's exactly the kind of thing that the business community wants is something really ambitious that's gonna drive the relationship into a new level. Okay, Scott, again, you've been in the trenches for a long time from a business perspective, who's actually a company that's invested a lot in China and has been very successful in China as well. Again, same kind of question. What is businesses, how has businesses of view changed over the years? And do you think that that's a problem for the relationship or is there an opportunity there to take it to a new level? Sure, thanks. Look, one of the things in the last 20 years of the US-China commercial relationship, one of the things you can always rely on is a disconnect between Shanghai and Washington in terms of how business looks at the relationship. And companies that are invested in China, doing business in China, have always had a different relationship than what you have policymakers thinking along here. For a long time, the business community was, as you mentioned, strongly bullish on China. So it's a great opportunity for trade and investment, great new market, more, what a half a billion people raised out of poverty becoming consumers is a great idea if you sell shampoo and soap. So there's a lot of wonderful things going on and for many years, the business community strongly defended China against the worst instincts of suspicious Congress. I think things are different now. Importantly, there's still a disconnect between the business community as they're on the ground working on operations in China and the policy community in Washington, but this candidate is different today. I would encourage any of you to go online and look at the US-China Business Council's annual survey of the business environment. They run it every year. It's a great survey of real policymakers about half of them based in China, about half of them in the C-suite in the United States, but they've been asking the same questions for at least 15 years and they publish the results and it's quite revealing. This year, the characterization was temperate optimism, but what you really heard from business about the business environment in China is, first of all, everybody noticed the moderating growth. And when you grow 10% a year for 15 or 20 years, you cover a multitude of sins in a business plan. It's actually a pretty good life and businesses have noticed the slowdown to seven, eight percent on top-line growth, but actually you exclude some of the funniness in that. It's closer to four or five percent. And once again, this is not surprising. China is reaching the point on a per capita income basis where every other Asian tiger is slowed down, including Japan. You go back and inflation adjusts to dollars. When Japan became a middle income country in the 1960s, their growth slowed from 10% a year to six, five, something like that. Same thing happened for Korea in the 70s and 80s. So this is not unusual at all. But there's a subsistence that's happening in China, but in addition, businesses are facing rising costs. Everybody complains about costs now in China. Everybody complains about the intensified competition, mostly from local companies, private sector and state-owned enterprises are getting more sophisticated, are getting more competitive. It's not as easy as it was 10 years ago to do business in China. There are also, the survey reveals, a set of persistent problems. Problems may have already always been there. Licensing difficulties, uneven enforcement, discrimination against foreign enterprises, lack of transparency. What the survey notes this year I found striking is that there's a feeling among businesses that it's not getting better, okay? And that not getting better is probably the problem. So you have this sort of disgruntled realism, which is probably a better term than temperate optimism. The business community. On the other hand, what I've noticed is the hostility or suspicion about China in the Congress is dialed back significantly versus where it was even five years ago. This was, you know, business community spent a lot of time defending China against a really hostile attitude in Congress about really sort of perceived unfairness. And perceived unfairness is easily reinforced when the U.S. economy has 10% unemployment and China's growing at 10% a year. Now, a couple things have happened. First of all, the growth rate, the diminution of China's growth has reduced the tension. It's had a couple of effects. First it's all reduced pressure on commodity prices, which affect U.S. business. It's reduced pressure on import competing industries in the United States. So members of Congress with a slower growing China actually hear fewer complaints from constituents. The other thing that's happened over the past decade, and Ambassador Roy mentioned this as a factor, is China's a big Hong Kong export market for the United States. And it's suddenly dawning, you know, step-by-step constituent meeting by constituent meeting on members of Congress that they have real, that their constituents have real export interest in China. This is a growing secure market. In the farm belt, there's no China bashing, okay? China, half a billion Chinese improving their diet has done more for farm prices than any farm program ever enacted in the side of man. So there's a lot going on that's positive. Now, so what you have is a little bit of a convergence. The Congress is probably less hostile. The business community is less overjoyed, okay? And that creates an interesting dynamic. I do note also that in U.S. Trade Representative Mike Froman's confirmation hearing, it was unusual as a USTR confirmation hearing because the complaints from the senators were about India, not China. I mean, it's really a change of pace. So it's a moment of realism and a moment of where there's some constructive opportunities, whether we take them is another question. All right, look, the Trans-Civic Partnership is the big stretch call, okay? But as Charles pointed out, nobody knows what's in it, all right? And second, I think the most likely course of event there is that the 12 parties negotiating now, including the United States, conclude the agreement and everybody steps back and logs on to USTR.gov and reads the text and find out what do we get? Do we get chorus or something like chorus? Did we get a real 21st century agreement? We don't know. At that point, decisions will be made here and with our trading partners in the Asia Pacific. And I think that's an okay timetable. Look, China has moved a long way in its discourse on TPP. Two years ago, it was sort of suspicious of the thing. It moved to a point of actual hostility where we had the ghost of the Cold War. It was containment strategy, or containment being used as if George Kennan came back and wrote a new chapter. And now there's real curiosity about what's in TPP and how it can help. So I think that's constructive. But I think we're gonna have to wait, conclude the agreement, see the text, and find out where the interests lie. There's lots of other indicators. In the WTO, there are key indicators. Look, in July, China basically tabled the text in the information technology agreement too that was so unsatisfactory to trading partners that he suspended the negotiations, okay? In the same month, China and the United States, that is strategic and economic dialogue, proposed a very impressive, deeply enhanced bilateral investment agreement, which had been collecting barnacles since 2008. Okay, so make what you will of that. At the same time, another indicator. In September, China petitioned the current members of the International Agreement in Trade and Services, the TISA, Trade in Services Agreement. Also being hosted in Geneva and want to join. Now that's an important turnaround if it is serious because China worked with Brazil and India and others to prevent the TISA from being a real WTO multilateral agreement. So it's being connected in Geneva, but it's done under rules that make it not a WTO agreement. So after preventing this in 2011, now China wants to join. So there are some interesting things to watch. At this point, I'll just say, watch this space. Can I pick up on that last set of points and ask you and then Charles, because he was doing this stuff. If you're a US negotiator on any of those issues, the BIT, the TPP, the TISA, the ITA renewal, do you want China in? I mean, you want, what is China bringing to the table and what does it burden the table with? Or does it depend on what we're talking about? Which of those agreements we're talking about? Charles would know better, but I would say it depends on the substance of the engagement, okay. An information technology agreement too, the country beside the United States that benefited the most from ITA-1 was China, okay. And for China to table a lousy offer in ITA-2 was an insult to the process and was downright harmful. If China sees its interests as opening up and modernizing its services sector, which to Charles point about moving up the value chain, look, embedded services are about half of world trade. If you really knew how to count them, okay, services are vitally important. Services markets in China are uncompetitive by global standards. And to the extent that a trade and services agreement helps China in its serious move toward reforming and opening up and modernizing its services sector, I think that's a good thing as a negotiator. It's good for the world. Yeah, you want a motivated China at the table. You don't want an obstructionist China at the table and you don't really know what you're gonna get. Chinese are wonderful negotiators. They've learned very quickly from that what we do is we tend to lay all our cards in the table and they can kind of pick the ones that they want. And you know, if they want the same things that you do or they are preeming for an ambitious agreement, it's wonderful to have, it would be wonderful to have them at any one of these agreements. And I really think we'll find out more next week about whether the China that wants to join TISA or is making noise about TPP is a motivated China. Okay, let me, I want to come back to something Scott said about the softening of congressional views and you didn't talk, I don't think, about Chinese investment in the United States. As a Japan guy, a lot of the things you said, you could have substituted the word Japan for China and a lot of those things is what sort of was the arc of what happened with Japan. We had the tension when Japan was growing fast and the US was in the dumps, Japan slowed down, we got better and it sort of, it died off but there were some other things going on like investment. Well now that I'm onto this subject, let me ask about everybody about this because I think it does have impact on the broader relationship. So there is, there are predictions. I mean China's already starting to invest in the United States, but compared to its economy, compared to our economy, compared to other investors in the US, it's still relatively small but growing fast. It raises some challenges in terms of national security but also politics here in the United States. But it also has the central beneficial effect of giving and creating a new constituency of people employed by Chinese companies who support the relationship. How do you see that state and, you know, Chris if you wanna comment on that too. I think the positive potential of Chinese investment in the United States is enormous. If you look at the record of the committee on foreign investment in the United States which is the body suffice that screens foreign investment, most of it is approved. It creates jobs, it enables the Chinese to learn how to invest successfully by having to adjust their own management worker values in order to be able to produce goods in the United States. Japan went through this process. It was extraordinarily painful. They had a 10 year process where they were just making mistakes left and right. Now I understand that 20% of foreign investment is Japanese because they learned how to do it. There are certain areas where governments are going to be concerned about security considerations. But let's not overdo this. Every time you criticize a Chinese high tech company because of some security problem, you are undermining the international competitiveness of a US high tech company that has enormous export markets. Don't forget, if Huawei can do it, so can American companies do it. So I think we ought to be a little bit careful. Identify, does it really matter whether some telephone exchange in some town in Iowa uses Huawei equipment? Is that gonna compromise our, I had to sell my AT&T stock when I was ambassador in China so that I could promote AT&T switches for China's telecom system. And so, all I'm saying is, there are areas we need to be concerned, but these can easily be exaggerated for reasons that are not truly related to security concerns. And if we look overall, China's, I was down in South Carolina. South Carolina is welcoming Chinese investment. It's producing little refrigerators for college rooms. It's producing all sorts of white goods that people want. I mean, to me, this is an enormous area, and we, from the standpoint of the Chinese investor, do not have as attractive an investment environment as many other countries. Sorry, just to elaborate on that, you mean because of the perception that we're not friendly to Chinese environment, or because of our labor costs or lack of education or infrastructure. Because of the perception that the United States is not friendly to Chinese investment. And here there's an enormous difference between our states and our federal government. At the level of states and governors, they are eager to get as much Chinese investment as they can. In Washington, people will raise concerns about wooden clothespin exports in terms of our security. Okay, there actually was a case, not involving China on wooden clothespins. I remember this from the Cold War days. Wire hangers. Wire hangers. Wire hangers. Charles and I worked on wire hangers. It was broom handles with napkins. Broom handles, yes. Which is to watch out. Can I just say one thing about the investment piece, because I think it's so important. There is the concern here that Chinese investment is strategic and not commercially motivated. And I think that for anybody that's worked in business, strategic investment doesn't work, it fails. If something doesn't have a commercial motivation, it will fail. So I don't see that stereo. Okay, since State mentioned technology, let me ask a sort of different but related question to Chris about how the sort of cyber debate has evolved. Because as late as Sunnylands, the President of the United States was still, frankly, being pretty aggressive on the issue of cyber theft, particularly of trade secrets by private U.S. companies. In the last couple of months, some other things have intervened, including the Snowden affair. And it seems like the dynamic has changed quite a bit. What is sort of what's going on and how is that gonna play out in the economic relationship on both sides? Yeah, thanks. Let me just say one word real quick about the bigger investment picture. I actually think if you looked back three to five years ago, the top bilateral friction point was currency valuation, rent-reviewed valuation. Now, when you talk to people, this is the issue that's emerging. And it's two-way, both, it's will both countries be able to invest in the other on a level playing field. I think that's really the issue that's emerging as the key challenge in the bilateral economic relationship. I agree with State 100%. To me, it's a huge opportunity. I mean, when I saw, for example, that the Smithfield, the Ham deal, they had to go through CIFI. I just thought that was insane. What's the national security implication of Ham? It's a little hard to see that. But I do think that we do look at it from different perspectives. But, and I wanna just echo also something else said about how the other countries are kind of hitting one up on us with regard to this. Where is the most dynamic marketplace right now or sort of cutting edge technology and so on for shale, oil and gas exploration that's here? And yet the Chinese are virtual non-participants despite their huge desire to be able to participate. It's a tough one, and direct ownership is always gonna be hard and so on. But what's been interesting to watch is how they're starting to learn to go in with partners or to take the minority stake and that sort of thing. And they're still getting the message, I think, from law firms and others who are helping them here with this investment is, if you want technology and you want training and you wanna get your guys there, so we can get you that far. But if you want the whole ownership and decision making authority and so on, that's gonna continue to be problematic. But I think we've gotta get this piece right. On the cyber piece, I think it's fair to say that 90% of the air has come out of the balloon, certainly since Sunday lands. I do wanna stress though that I think it's very important and I think the administration's doing a good job on this to continue to try to highlight and draw what is a fair distinction. Between economic and trade secret theft and traditional espionage. I do think that there's a valid distinction that needs to be made there and I would encourage the administration and they are, I think, to continue highlighting that issue. Our own credibility on the issue, however, has been damaged, not on that distinction but on the kind of effort to perhaps at least be viewed as on the moral high ground with regard to this. And I don't think it's because of the Snowden revelations to me, there's nothing too terribly interesting in a lot of those but I think what it does do is it allows people with whom we are having disputes over these issues to distract from the main issue which might be this trade and IPR theft, tour de yes but what about, you know, your eavesdropping and so on. So it allows them to change the conversation when they don't wanna talk about it, right? And I think that's been the most damaging component of that whole episode. The other component is just what State referred to earlier which is this whole issue of the damage done to our own high tech companies. There was an article in the Chinese press some months ago that talked about the so-called eight guardian warriors and it's all of the main U.S. technology companies and the strong thrust of the article in the Chinese press was these companies' equipment needs to be eradicated from China's system and there's plenty of evidence that there have been some industries or some ministries then some directives that have gone down suggesting that equipment be removed either immediately depending on the sensitivity of the industry or over time. So I do think that's a fundamental issue as well. Will it remain a fundamental challenge in the relationship you bet going forward? Okay, I wanna open this up to the audience but does anybody wanna comment on any of those issues? But just one comment on the investment point which is, number one, we need the money. I mean, look at our trade deficit, okay? Second, I actually think China will have an easier time than Japan did because China is a fundamentally more open economy than Japan was at the time. Part of a lot of the tensions, the U.S.-Japan tensions commercially were rooted in the fact that the Japanese market for practical purposes closed to American firms and yet our market was open. China's market is relatively open compared to Japan at the time and I think the cross investment will be a useful thing but I would agree with the comments made. I mean just one thing, you know that part of the challenge for China is that it's a lot easier for the state-owned enterprises to invest here but they're not the dynamic companies that really should be, it could be most successful here. The non-state companies really are the ones that could really benefit from a lot of the investment here and they lack the access to credit and things like that would pave the way. Okay, well a lot of other questions but I know that you have questions as well so we have microphones, please wait for the microphone and identify yourself and do ask a question please. There's a gentleman in the back. Hi, thank you. Jim Shudo with CNN. One phenomenon became aware of during my time in China the last couple of years was this sort of use you and then move on phenomenon with American businesses there. Cisco for instance had great business in China until there was a local champion in Huawei and then Cisco sees its business disappear. You have that phenomenon happening now with IBM partly driven by the Snowden revelations. It's a good excuse for Chinese companies not to buy IBM services when they have this excuse. I direct this to Charles Freeman but I imagine others might have comment as well. Do you believe there's substance to that complaint from American businesses among their many complaints that China will take advantage and do business and give them opportunity as long as it suits their interests and then when either they have a local champion or some other priority they will push them out. Do you think that's overblown and do you think that falls into the category of something that's getting worse or better as you referenced earlier? Yeah, it's a good question. On the Cisco issue Huawei will tell you that Cisco sells more to the Chinese government still than Huawei does. And I think for a lot of companies that have been in the capital equipment business there's a problem with just, there's a certain capacity that you reach and you just can't buy a whole lot more. And so companies I think do have to adjust their business models, adjust what they're selling in China to recognize that the market itself is changing. On the other hand there are certainly the directives that go out from NDRC or some of the other ministries that say do this and don't do that and do this and all the rest of it. I don't know how often those are actually followed. And if you talk to people at NDRC there's enormous frustration that a lot of the things that they want of their own company, particularly even the SOEs that they don't actually get. That what they want to see the industrial policies that they're pushing through are not successful because people are ignoring them. So in answer to your question is are there efforts at times to kind of, to benefit local champions to the exclusion of foreigners? Sure, but I think the Chinese economy and the Chinese politics so dynamic and diverse that I think it's very difficult to marshal the collective energy of the state to achieve any specific answer. Anybody else want to take that on? No, okay, sir. Hi, Chen Weihua, China Daily. Yeah, I have a question for Ambassador Lui. You talk about the grand strategy between China and the US and you think we should play more emphasis on economic cooperation. But right now, I want your comment on this Asia pivot, I mean, which will have massive relocation of American military power into that region. I don't know if I remember correctly, like 40 more percent of the US Navy is gonna be there. So do you think that's going to have a positive and negative impact on this sort of a grand strategy? Obviously, the Chinese are not very happy about this. Thank you. I prefer to refer to the policy as a rebalancing strategy rather than a pivot strategy. I think the administration is misrepresenting their own policy. As I read the policy, what it is designed to do at a time when China is rising rapidly is to demonstrate credibly to our friends and allies in East Asia that the United States intends to maintain a robust presence there and has the resources and the will to do so. We are facing global financial stringencies and we are facing the possibility of cutbacks in our military budget. The one area of the world where a significant drawdown in the US military presence would have a negative impact, negatively affecting China is in East Asia. So we are going to be drawing down our forces elsewhere in the world, but we shouldn't be doing this in East Asia or else China's rise becomes a threatening factor to countries around China and they will respond as we've already seen indicators in recent years by trying to get big powers like the United States to put more resources into the region. So I think the re-balancing strategy is not a military buildup in East Asia. We are going to be relocating some military forces here, but in many cases they're going to be based on the West Coast of the United States. Why? Because it's cheaper. We're under financial pressures. I have talked to the, or I've heard the chairman of the, what's the name? Chief of the Naval Operations. Basically say, he has all the ships he needs in the Western Pacific. He doesn't need a big buildup. So I think it's wrong to present the rebalancing strategy as a big military buildup. What it's designed to do is to show that a United States that is seen widely in the world as a declining nation under fiscal pressures in East Asia is going to remain as a strong presence there. And in my judgment, this is going to contribute to China's peaceful rise rather than detract from it. Now I know if I were sitting in Chinese shoes, I might think twice about the logic behind my argument, but frankly I've thought a lot about this question, and in my judgment, a proper rebalancing strategy, which I think is the goal of the administration, is going to contribute to China's own ability to continue rising without destabilizing the region. Okay, sir. I'm Owen from China Energy Found Committee. I have a question regarding TPP. How do you think, what do you think of China's attitudes towards Taiwan's intention to join TPP negotiations? Do you think whether China can accept the fact that maybe Taiwan is in TPP someday in the future, but China is still out? If not, do you think China will push Taiwan to join RCEP prior to TPP? Thank you. You know, I think even a threshold question is whether Taiwan is prepared to join TPP. I'm not sure, and the question was asked earlier whether the US would welcome China in these other negotiations. And the answer is, yeah, motivated China, sure. On Taiwan, I have to say that the relationship between our respective trade officials is not good. There is a perception that Taiwan can't actually deliver its own domestic political process to support an agreement. So I don't think the question is whether China is going to prevent Taiwan from joining TPP. The United States is not going to say, no, no, no, we're gonna let China veto this process. That's not the way it would happen. Maybe others in TPP would raise a voice. But I think that a fundamental question is, is Taiwan really prepared to liberalize its own domestic system? I think right now the answer is no. Yeah, just two additional points, I agree with Charles. One is that any decision for a party to join TPP would be a 12-party decision at this point. It's not the United States' role to say. They would have a voice in it, but not the only voice. Second, I would note with interest that China has just concluded a services trade agreement with Taiwan. And the prospects for that and the benefits associated with that agreement will have an impact on both Chinese and Taiwanese trade ministries and how they move forward. Okay, sir. I have a question for Ambassador Roy. Can you identify yourself? Xiaoyang Xia of Wenhui Daily, Shanghai, China. As you mentioned in your opening remarks that after the fall of the Soviet Union, US-China had lost sort of a common ground for strategic cooperation. And so do you think that the two sides could find or reestablish sort of common ground again? And if so, what would it be? Would it be economics or global issues? And also right now the competitive sides has dominated the bilateral relations. Do you think is it still plausible to maintain the US-China strategic stability? Thank you. I believe that we, I mentioned that we went through a difficult transition period when we had lost the previous strategic anchor for the relationship and that now we were dealing with China as two major countries dealing with each other. In my judgment and in my experience, we have discovered an enormous range of issues where we in China have common interests. We cannot deal with the North Korean nuclear problem if the United States and China did not have a common unwillingness to accept a nuclear North Korea. And we are working cooperatively there. This is a big issue. While we have different interests with respect to Iran because China is more dependent on energy from Iran than we are, we have a common interest. It's not having Iran go nuclear. And in fact, there is cooperation at the United Nations between the United States and China on that type of issue. We and China are the two largest contributors to global warming. If we are unable to cooperate together, we are going to pull the rug out from under global efforts to bring the man-made component of global warming under control. And so that's an important area for China and the United States to work together. The educational sphere is an enormous area. American universities are offering branches in China. China floods us with their best and brightest students. That's an area where we can continue to cooperate and expand. Our military are beginning to restore an ability to interact with each other that has been interrupted for most of the last 20 years. We now have the most active and highest level military exchanges with China that we've had since the 1980s when we got up to a fast start in that area. This is a very positive area. And I think what we'll discover as we have these types of engagements is that in fact, there are many issues in East Asia and other parts of the world where we have common interests and are not simply competitive. So I believe that while we do have the competitive factor and I could talk additionally about all the areas where we have dissimilar interests, that the common interests are strong and I think the economic component of the common interests can contribute to a relationship that involves strategic competition, strategic cooperation, but is relatively stable. Yeah, sure. I just would add that I think another boon to that process is China's growing comfort with operating in multilateral spaces. In the past, they did not wanna do that. Now increasingly they are. Their agenda sometimes is pointed in those multilateral institutions but they are becoming more comfortable there and I think those offer other opportunities for the US and China in the region, for example, the ADMM process, things like this. I think there's tremendous potential to use those as a bridge to help us with some of the more sensitive bilateral issues by having other people involved in the conversation. Let me in that context put in a plug for APEC which is a little heralded or appreciated but actually it's been an area where the US and China have done some useful productive things together and China's hosting APEC next year and I think there's an opportunity there to increase that cooperation. So let me take somebody in the back of the lady there. Thank you, a reporter from The Voice of America. We've been talking about the economic relations that has been the most positive area in the US-China relationship but recently I've sort of seen some like hostility coming up. On the recent ABC talk show, a little boy was asked how they're going to pay China the debt, the US debt they owed to China and he said, how about we go into China and they kill all of the Chinese here? So I'm just wondering what's your comments here? Do you see it's just a little boy's imagination or it's a certain fear in the US society about China being the biggest investment, about investing in China in the United States? Thank you. Yeah, sure, I just would say I don't think you can judge the US feelings on things or character from the word of a seven-year-old or six-year-old or whatever he was so I'd be cautious there but I do think more broadly and this comes back to something State mentioned earlier on this is where the people-to-people relationship is so important, right? Being able to create a familiarity with each other in a comfort level with each other that helps dispel some of these rush-to-judgment kind of opinions that are developing in both societies. I mean, let's be honest here there's as much of this going on in China as there is in the United States and in some ways perhaps in China it's more dangerous. So I think this is where that people-to-people piece which is often overlooked is a very, very important also stabilizer in the relationship. Okay, yes. Thank you. With China Review News Agency of Hong Kong actually I have a follow-up question about the debt that the Chinese is holding and the interdependence of US-China economic relationship is regarded as one of the key elements to stabilize the US-China relations but right now the US is pushing China to change its economic growth model from the export-driven to the consumption-based. So do you think in the long-term it could be reducing the incentive for the both sides to cooperate rather than conflict? Do you think the China's reducing of the-reducing the holding of the US Treasury is a good thing for the United States? Thank you. Maybe as the former Treasury guy. I shouldn't answer this question because there's a little chip planted in my brain does not get into these sorts of questions but I mean I don't see the inconsistency there because actually I think if, I mean what the US is worried about is that in a post-crisis environment in which the United States has been forced to save more, deleverage all levels and where government borrowing is actually coming down. I mean it's the pace is decreasing because deficits are shrinking pretty fast. That there is a need for another source of growth than the traditional model of the US sort of over-consuming borrowing and depending on other countries to finance that lifestyle that it can't support itself. And what the US is worried about is we need some other sources of growth and China and Germany by the way is very much in the sights as everyone's seen in the last a week so it's not just China shouldn't take it personally it's large countries that have persistently maintained current account surpluses that are in the sights of the US Treasury they feel that those countries, I mean they argue based on the economic logic that those countries need to step up and be a greater source of global demand otherwise the world is gonna suffer. There's gonna be less of a source of demand because the US can't be the consumer of last resort from now on and in a world and that's why the US keeps harping on strong sustainable and balanced growth which is the mantra of the G20 as you know and they continue to focus on balance and the German example in the latest exchange rate report shows that this is a central concern of the US Treasury and in a world where there is greater balance there should be more balance in financial affairs as well and that over time is a good thing in terms of ultimately creating greater global financial stability so I think that's the way I look at anyway and as opposed to will, should, China, what happens if China starts selling all its treasuries which is not gonna happen in an absolute sense relatively they may invest less in our treasuries over time as I say in the context of greater rebalancing overall that's not inappropriate. Yes ma'am. Thank you, my name is Jeanine Nguyen with Voice of Vietnamese Americans. My question is to Ambassador Roy but to the whole panel. Come back to the grand strategy which is something we hope that will sustain the peace and growth of the region. I think the pivot to Asia first was to focus on Southeast Asia and the market there with 600 million people and developing countries where all the potential buying, consuming would be. So with the TPP, China is not there yet. Now the question was between exporting and importing economy in China and you just answer that to balance the global market. Where do you see Vietnam fits in? Because Vietnam geopolitically is between China and the rest of the region and the US and Vietnam is a member of the TPP. Vietnam also share the governing system with China. The ideology with China with the SOE situations and all the problems with China and Vietnam also is being most of the market in Vietnam. We're in significant trade deficit with China. On the paper and off the paper, there's tremendous product from China that went into Vietnam through the borders without any recordings at all. So I understand that there is a problem with the rules of origin with Vietnam entering the TPP and China is ready to take advantage of that. So where do you see the potential Chinese taking advantage of this TPP market through Vietnam? I learned from many speakers, especially Ms. Boniglaser that China is very good at taking opportunity, opportunistic in many different fronts. And what lesson have we learned in dealing with China embracing China in the WTO throughout the last decade with their manipulations in many different fronts? That's a very complicated question with a lot of different strands. But let me, the Vietnam was one of the few Southeast Asian countries where you were not Ambassador of State, but perhaps can you comment on the sort of the bigger question about Vietnam and China and then maybe these guys can help with the trade. Let me briefly comment on the first part of your question. I think an important component of the rebalancing strategy is to be paying attention to Southeast Asia. I think objectively speaking earlier, we were never neglecting China, we were never neglecting the North Korean nuclear problem. But beginning with the development of new architecture in East Asia following the Asian financial crisis in 1997, frankly the U.S. government was not paying attention. For example, in the Bush administration, which I thought did very well on the China side, they never made up their minds whether they wanted the United States to join the East Asia Summit. How we could not have a view when all of the top leaders of Asia were meeting together and we didn't think whether we should be there. So President Obama who of course spent part of his childhood in Southeast Asia understands the important significance of the area. You referred to the fact that it's the market of 600 billion people, the million people. It's a very significant area of the world. And I think that the U.S. strategy now in East Asia is much more balanced between the Northern parts and the Southern parts. But the TPP parts of this question I will turn over to my colleagues. Just I guess to the extent your question is can China take advantage of Vietnam's participation in TPP? I'll say one thing. One of the current kind of topics about sort of the political impediments here to TPP is over the question of footwear imports. And because in part because we have there's production of certain footwear up in Maine that folks are concerned that if there's a free trade agreement that greater imports from Vietnam or footwear will disturb that production. But that production actually is essentially imports of components from China for reassembly here. So the issue for me is if China's already taking advantage to the fact that Vietnam is not in TPP to the extent that we think of it those terms. So I think there are plenty of opportunities that Vietnam has as long as they can convince our negotiators to use appropriate judgment with respect to rules of origin and things like that. Okay, I'm being given the high sign in the back. I'm afraid you'll have to do your follow up question up here but let me thank our panelists for joining us for a very interesting discussion. I learned a lot and hope you did as well. Please give them a round of applause. And I think I haven't been instructed what to tell you but I think there's a short break and then the next session starts at 11, I believe. 11.15, 11.15.