3 Hurdles to U.S.-China Economic Dialogue

The escaped activist is only one concern for negotiators seeking economic cooperation.

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With the spotlight trained on activist Chen Guangcheng's escape from house arrest to the U.S. Embassy in Beijing, it can be easy to forget that another, perhaps bigger topic looms over the U.S.-China relationship this week.

Thursday marks the beginning of the fourth U.S.-China Strategic and Economic Dialogue, with secretaries Timothy Geithner and Hillary Clinton traveling to cochair the dialogue alongside top Chinese officials.

The Chen affair has threatened to suck the oxygen out of the negotiation rooms, but both the U.S. and China appear determined to ensure that the dialogue goes forward as planned. Whether or not the Chen matter is resolved by Thursday, here are three more hurdles to U.S.-China agreement on key economic issues.

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Congressional Inaction (Surprise, Surprise)

The U.S. has several objectives in China, as described by Geithner in a speech to the Commonwealth Club of California last week. Those goals include expanding U.S. export opportunities in China, substantially reforming a financial system that is dominated by state-owned banks, and moving China away from its export-heavy growth model with the hope of spurring the massive population of Chinese consumers to spend.

Those moves could be good for both the U.S. and China, but as with any diplomatic relationship, there is give and take. And on some key issues, the U.S. may not be able to give all that much without congressional approval.

China has made steps toward economic openness in recent years, says Nick Lardy, senior fellow at the Peterson Institute for International Economics, like loosening its grip on its currency, the renminbi, allowing it to appreciate slightly.

"Now we keep saying they should liberalize further, but we don't really have much to give them in exchange for that," says Lardy, pointing out that U.S. negotiators will have little room for action on some issues: "The things [Chinese negotiators] ask for we're not able to give, primarily because they would require congressional action," he says, pointing to tight U.S. restrictions on some technology exports to China. The U.S. government maintains that some high-tech goods could potentially be used for military purposes. But as Forbes has pointed out, this includes harmless-seeming goods like brake pads and SIM cards.

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A History of Mistrust

Opening up more Chinese markets for foreign investment and reforming the banking system could boost growth both within and beyond China. But it's precisely because Geithner will be pitching these ideas that China will be wary of adopting them.

"Various treasury secretaries have been going to China for years, telling them that various things are in their self-interest, and some of these things have turned out not to work out so well even in our own system," says Lardy. "I think the Chinese, maybe like many other governments, are always suspicious when proposals are made that would benefit the person making the proposal but [are] being sold on the ground that it's in the other party's interest."

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The Nature of the Beast

If "success" is defined as "reaching major agreements toward compromise on key issues," this week's dialogue could easily be a failure. That's because coming to agreements with China on large issues of international trade is a very slow process.

"On specific issues, we've typically seen some progress on a handful of things, incremental progress in other words. But nonetheless, for many companies, important progress," says John Frisbie, president of the U.S. China Business Council. Major changes, whether it's in China's banking sector, U.S. exports, or renminbi valuation, cannot be made overnight.

In addition, there will only be two parties in the room. In a globalized economy, there many other key players who can influence China.

"The U.S. doesn't really exert significant bilateral leverage over China, and it never has. (Nor for that matter does China exert real influence over the United States.)" writes Elizabeth Economy, C.V. Starr senior fellow and director for Asia studies at the Council on Foreign Relations, in an E-mail.