Robert D. Hormats
Under Secretary for Economic, Energy and Agricultural Affairs
Remarks at Brookings-Caixin Conference
Washington, DC
May 18, 2011

As prepared for delivery

I would like to thank my old friend Ken Lieberthal for the kind introduction and invitation to participate in this joint Brookings-Caixin conference on what lies ahead for the United States and China. And also to Madam Hu Shuli for her thoughtful opening remarks. This conference brings together one of Washington’s leading think tanks and one of Beijing’s most influential media groups. This is truly a unique event, and I am sure that it will produce some interesting insights. And I am pleased to be here today.

Last week, Secretary Clinton and Secretary Geithner concluded the third Strategic and Economic Dialogue. The 2 days of high-level exchanges between U.S. and Chinese officials on an economic track and a strategic track were fruitful. For example, on the economic track, China committed to making more long-term improvements in its protection of intellectual property rights including strengthening its inspection system for procurement of legal software. We also discussed "competitive neutrality"—to ensure a level playing field between private firms and State-owned Enterprises.

On the strategic track, we had candid discussions on some of our most persistent challenges, such as North Korea, Iran, and discussed areas of cooperation, including environmental cooperation. We established new U.S.-China consultations on the Asia-Pacific region, where we share a wide range of common interests and challenges. We also held the inaugural session of the new Strategic Security Dialogue, where senior civilian and military leaders from both sides sat down to discuss how we can reduce the dangerous risks of miscalculation and misunderstanding. This year's S&ED continues a recent positive trend in U.S.-China relations in 2011, after having faced a wide range of challenges in 2010.

As we look forward over the next 5 years in my area of the U.S.-China relationship, which is economic, a critical question emerges: will China work within the rules-based, market-driven, international economic system created at the end of WWII, or instead strive to dramatically change it?

China is searching for a balance between, on the one hand, policies to address its domestic challenges and pursue its statist approach to economic management, and on the other, its increased obligations and responsibility for the global system as a whole—on which it depends heavily.

Over the decade and a half, after the fall of the Berlin Wall and creation of the World Trade Organization, the world economy experienced one of the fastest periods of growth since World War II. During this period, American, European, and Japanese global companies prospered, and a near universal acceptance emerged that open markets and private investment are the key to economic growth. This acceptance is the underpinning of the liberal international economic system that we enjoy today.

Over the past decade and a half, China has enjoyed dramatic growth, thanks largely to its own reforms and hard work of the Chinese people. The economic reforms with Chinese characteristics initiated by Deng Xiaoping, and other reformers have lifted hundreds of millions out of poverty and helped create a growing middle class. But China’s dramatic growth is also due to a stable global financial system, market access benefits of WTO membership and enormous capital inflows.

Recently, the global financial crisis and the spectacular rise of the non-Western emerging economies, especially China, has posed questions in some quarters about the validity of the Western-based international economic system. Those who pose such questions often point to the emergence of the state-capitalism model, or the so-called "China Model," that focuses on building and strengthening national champions—state-owned enterprises (SOEs) or state supported enterprises (SSEs), or even state-preferred companies.

Much of what China has accomplished, as noted, is due to its own ingenuity, its own reforms, and the hard work of hundreds of millions of Chinese citizens. But the competitive advantages enjoyed by many of China’s state-owned enterprises and state supported enterprises also have conferred certain artificial advantages and produced a number of trade distortions.

It is clearly China’s choice whether or not to create and sustain state enterprises. But where SOEs and SSEs are made artificially competitive by practices that distort competition—privileged financial support, regulatory benefits denied to private companies, protection against competition, practices that enable them to obtain intellectual property at the expense of other companies, or enable Chinese companies to obtain advantages in government procurement—these policies become a serious concern to the United States and other trading partners.

They impact and threaten the competitiveness of American private companies, those of other countries, and even Chinese private companies as well. Our goal is to work with Chinese authorities to encourage a greater movement toward the norms of the global system in these areas.

But it is important for Americans not to attribute the remarkable progress that China has made primarily to the many areas of difference our two countries have on economic policy or structure—or to many of the distortive measures I have just listed—as troublesome and harmful to competition as some of them are. If we resort to blaming China for the bulk of our economic problems, we may be diverted from the major efforts we must take at home to fix them—or conclude that China’s rise over the United States is inevitable and that we can do nothing about it. Whether or not China overtakes the United States as the world’s leading economy in the coming years will depend more on how well we manage our economy here at home than on the polices China chooses to pursue for its own economy.

It is also useful to put China’s spectacular growth, and its increasing share of the global economy, into perspective. For all its enormous accomplishments—and indeed they are enormous—it is important to remember that real internal challenges exist in China.

The last session of the National People’s Congress demonstrated that income gaps between the rich and the poor, the cities and the countryside, and coastal and inland provinces continue to top the list of concerns for the Chinese leadership. Corruption, resource constraints and environmental problems compound these challenges even further. These are not criticisms from the United States—the ability of the Chinese leadership to examine their challenges is commendable.

Maintaining domestic stability remains a top priority for the leadership. China’s focus on internal issues and commitment to domestic reform is reflected in its recently unveiled 12th Five Year Plan. In many ways, China is still a developing country with developing country challenges. The Plan aims to transform China’s economy from a high-growth, investment and export led development model to a more sustainable one based on greater domestic consumption and higher value-added industries that will spread the benefits of growth more equitably among the population.

While China searches for greater balance in its domestic economy and greater balance between its domestic challenges and its growing responsibility in the global system, it is critical that the United States and China engage in rigorous dialogue and regular engagement—in both bilateral and multilateral settings.

And that makes our high-level exchanges, such as the state visit of President Hu Jintao earlier this year and last week’s S&ED even more important. These exchanges build a foundation of mutual trust and respect that is necessary for a bilateral relationship the size of ours. They also add a sense of transparency and familiarity to our relationship. These exchanges also help us to adopt a long-term perspective and seek common ground, while resolving differences.

This administration maintains about 50 dialogues with China, ranging from trade and economics to politics and security. I can vouch for the significance of these dialogues and meetings. I co-lead the State-National Development and Reform Commission Dialogue, which I believe is one of our most productive exchanges. I have found our discussions to be insightful on issues ranging from resource security to industrial policy.

And just last week, on the sidelines of the S&ED, I conducted bilateral meetings with the vice chairman of SASAC, the State-owned Assets Supervision and Administration Commission, the entity in charge of SOE administration. His explanations of SOE reform were helpful in increasing our understanding of the situation in China and on ways to move toward a greater degree of "competitive neutrality." He opened the door to further discussions on China’s SOE reform, a topic we will explore more together in the future.

My bilateral meeting with the new National Energy Administrator on energy security was equally useful. As the world’s two largest consumers of energy, we must be able to exchange our views on these matters candidly.

Encouraging China to be a meaningful partner commensurate with its growing international obligations and clout also means that we have to use many multilateral fora as well. For example, we are encouraging China to play a more active role in APEC, our premier forum for strengthening economic integration in the Asia-Pacific. APEC’s goal is to remove trade barriers, foster regional economic integration and promote regulatory convergence and cooperation among the 21 member economies.

China has joined a broad commitment with the United States and other countries in the G20 to put in place mechanisms to ensure future global financial stability and economic growth. China is also increasingly active in the WTO, a rules-based trading system that it has been a member of for almost a decade now.

And although China is not a member of the OECD, the United States has encouraged China to be at the table for discussions on a number of issues there, including anti-bribery. The OECD is also engaging with organizations such as UNCTAD, which China has used in the past to discuss its economic model, in order to ensure convergence on topics such as competitive neutrality.

To be credible, any dialogue, multilateral or bilateral, must include a frank, honest and open discussion about our differences. The United States cannot tell China what to do. Our best option is to explain why assuming a more significant, responsible role in the global economic system and pursuing domestic policies consistent with them, is in the interest of China’s goal of sustained prosperity and opportunity for its citizens.

We should also recognize the benefits of greater economic interdependence between China and the rest of the world. The global system becomes more valuable to China as it becomes more intertwined with the fortunes of the rest of the world, and therefore it has a greater stake in the success of that system.

We have reason to be more optimistic on this account than a few years ago. Many Chinese companies are starting to go global as a part of the Chinese government’s ambitious "going out" strategy. China's outbound foreign direct investment, especially in energy and natural resources, has also surged in recent years, reaching $59 billion in 2010, up from a yearly average of $2 billion in the 1990s.

As Chinese overseas investment becomes more commercially significant, it is logical that its companies will want the same protections, predictability and assurances that other nations’ companies want. The same is true with China’s trade. If China wants to be accorded opportunities in the rest of the world—and play on a level playing field—it must accord them to others as well.

And China’s top leadership is starting to recognize the limits of their state capitalism model. Premier Wen, following the last NPC session, reaffirmed the government’s commitment to deepening SOE reform, answering to popular concerns about the economic inefficiencies created by SOEs and SSEs at the expense of the private sector.

2009 marked not only the 60th anniversary of the founding of the People’s Republic of China, but also the 30th anniversary of the establishment of diplomatic relations between the United States and the People’s Republic of China.

I had the great honor and thrill of working for Henry Kissinger during the early opening of China and of participating in several meetings with China’s leadership during the early years in our bilateral relationship in the 1970s and 1980s, and of attending the first game of the ping-pong diplomacy series in College Park, Maryland. Two of the most impressive of the leaders were Zhou Enlai and Deng Xiaoping. Both were strong Chinese nationalists, but both understood that opening China to the rest of the world, and better interaction with it, were in China’s long term interests.

Despite the incredible challenges of the past 30 years, what has remained constant over these past 3 decades—under eight successive Presidents of both parties—has been a recognition that our two countries have fundamental common interests and our relationship has enormous consequences for the world.

We in this administration, and I believe for the most part Americans as well, recognize the benefits of a prosperous China to our economy. And we believe that most Chinese see benefits in a prosperous America. As Secretary Clinton said last week at the S&ED, a thriving America is good for China and a thriving China is good for America. Our economic fortunes are increasingly intertwined.

Bringing China into the international economic system as a stakeholder and contributor is not just about generating opportunities for U.S. companies, as important as that is. It is also about preserving and strengthening a system that has enabled significant global economic growth since World War II.

The Chinese need recognize that if America, or Europe, or Japan, or people in developing countries see the system as unbalanced or unfair, and believe that one country is taking undue advantage of it while failing to make appropriate contributions to its overall success, they will react in ways that threaten the system’s future and that means China’s future as well.

We need to constantly remind Americans, and others around the world, that participation in an open and rules-based global system will continue to create substantial economic benefits by creating a predictable, level playing field for commerce and trade. But other governments need to bear that in mind when they make policies as well.

The growing perception that while the global system has created economic benefits for countries such as China and India, but is at least in part responsible for economic inequality and slow growth in the United States, must be met by assuring them that their government is taking policy measures to correct inequities and to achieve convergence on common norms. It also must be met by policies at home that make the United States more competitive.

We look at the next 5 years as a period of great transition in China and with China, internally and in its global economic policies. Constant negotiation and dialogue about mutual interests and shared responsibilities is the best possible course. Therefore, it is crucial that the United States remains engaged with China during this period of transition. The norms, disciplines, rules and principles of the international economy have served the world so well for three generations and can work even better if more and more countries apply them. Thank you, and I look forward to taking your questions.