Amid mutual political and economic pressures, the U.S. and China are pushing each other to change economic and trade policies seen by each side as being disadvantageous to trade and economic growth.
In China, the first day of the 4th U.S.-China Strategic and Economic Dialogue (S&ED for short) has already come to a close, and differences on economic issues have already stirred tempers.
Treasury Secretary Timothy Geithner, who represents the U.S. in the economic track of the talks, pushed China on Wednesday to continue yuan appreciation, in order to adjust what many Western analysts call an artificially deflated currency which benefits Chinese trade competitiveness.
Chinese officials on the other hand are urging the U.S. to lift restrictions on hi-tech exports to China, which they blame as the ultimate cause of the trade imbalance.
Both countries remain deeply concerned about domestic economic conditions. Although the U.S. may now largely be on the track of economic recovery, the Obama administration remains concerned over job growth and promoting domestic manufacturing.
The Chinese government instead is preoccupied with economic restructuring and putting further emphasis on sustainable development. The Communist Party is also worried about an upcoming political transition this year, which will replace the country's top leaders.
Geithner urged China to continue economic reforms, especially in the banking system; promote private enterprise; and reduce support for major state-owned companies.
The Treasury Secretary said that currency appreciation would reinforce China's reform objectives of moving to higher value-added production, reforming the financial system and encouraging domestic demand. Geithner warned that only a fundamental shift in economic policy would be able to sustain China's economic development. Western media reported that China may also agree to accept nternational rules on export credits.
Wang Qishan, China's Vice-Premier and negotiating counterpart to Secretary Geithner, said that the two countries needed to manage their own affairs first, especially amid a complex and grim global economy. That seemed to be a subtle hint for the U.S. to ease its demands.
Wang added that he was glad to see the positive signs of recovery in the US economy and the steady and fairly fast growth of the Chinese economy. Our two sides need to assess the situation in a level-headed way. He also told the U.S. not to politicize economic issues and to improve financial market access for Chinese companies.
Chen Deming, China's Minister for Commerce, blamed U.S. export restrictions for trade imbalances, pointing to restrictions on the sale of over 2,400 items to his country. China said that the U.S. has not only failed to relax export restrictions, but has instead tightened them in some areas.
The Brookings Institution, a major Washington-based think tank, reported on Monday that liberalizing China's currency regime is now less about correcting external imbalances than it is about helping to deal with domestic imbalances and promoting the currency's international use. The group cautioned that focusing on yuan flexibility rather than getting it to a desireable level would be more worthwhile for U.S. negotiators.
Using careful language meant to calm nerves in both countries, Chinese President Hu Jintao stressed that the bilateral relationship between the two countries did not come at the expense of any one side.
To build a new type of relations between China and the United States, we need to trust each other, Hu said during his opening address to the S&ED.
The S&ED mechanism was first created as a trust-building initiative between the two countries. As the first day of talks concluded, it appears to have served that purpose quite effectively.
But it remains to be seen whether the two countries are simply talking at each other, or actually working together to solve disagreements.