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Did the latest China-US dialogue lead to any progress?

China's President Xi Jinping speaks with U.S. Secretary of State John Kerry at the Great Hall of the People during the end of the 8th round of U.S.-China Strategic and Economic Dialogues in Beijing

Now we’re talking: Xi Jinping meets John Kerry to start the two-day Strategic and Economic Dialogue

When John Kerry was in Mongolia on Sunday he appeared in notably martial mood, posing for photographs with a traditional bow and arrow. The imagery of the US Secretary of State shooting a weapon will not have been lost on Mongolia’s neighbour China, which has been wary of America’s “pivot to Asia”.

However, the picture was somewhat different when Kerry arrived in the Chinese capital later the same day and was taken by his hosts to the Qianlong Garden in the Forbidden City. Nothing would seem to symbolise harmony more than a Qing Dynasty garden, and in this case that message was reinforced by the fact that the historic site was being renovated with the help of the US-based World Monuments Fund. The China Daily described it as a “symbol of the two countries’ cooperation”.

But as Kerry was being shown around the gardens, was Beijing also sending an alternate message? If Kerry was aware of his Qing Dynasty history he’d know that the complex was built as a retirement palace for Emperor Qianlong when he voluntarily abdicated power (in the late eighteenth century) after 60 years on the throne. Could this be a subtle hint from his host that perhaps the US ought now to consider ceding its status as the world’s sole superpower and accommodate a rising China?

Indeed, as part of the garden tour Kerry was taken to the Juanqinzhai. The China Daily rendered this in English as the ‘Studio of Exhaustion After Diligent Service’. Was it a deliberate act of messaging to place the American in a place of imperial exhaustion – a metaphor, perhaps, for the current state of US foreign policy, frayed and overstretched after 70 years of Pax Americana?

Of course, alongside such speculation we’ve also had some more direct statements, both during this year’s China-US Strategic and Economic Dialogue (S&ED) – which began on Monday in Beijing – and in advance of it.

This was the eighth S&ED meeting – a one-on-one forum that allows both powers to let off steam and (supposedly) build greater trust. But the fear among some analysts is that the two countries are increasingly talking past each other as their disputes become more intractable.

Issue one: the (ongoing) maritime disputes

Prior to this summit another forum had already soured the tone on the thorny question of sovereignty in the South China Sea. At the weekend’s Shangri-La Dialogue in Singapore US Defence Secretary Ashton Carter made plain America’s support for its ally the Philippines in relation to islands disputed with China.

The US, the EU and Japan have all backed the Philippines in bringing a case to the Permanent Court in the Hague, which is expected to give a verdict next month – doing so under the provisions of the UN convention on the law of the sea (UNCLOS). Beijing has said that it rejects the legitimacy of this court and will only deal on a bilateral basis with each country it has territorial disputes with. In the interim it has been reclaiming land in the disputed waters and increasing its on-the-ground presence – in a manner that some other Asian nations regard as aggressive.

On Saturday Carter said China’s expansionist approach in the South China Sea could lead to it erecting a “Great Wall of isolation” and alienating its neighbours. He urged China to abide by international law (i.e. to recognise any Hague verdicts).

This was followed by a press briefing in which US Pacific Commander Admiral Harry Harris made the ominous pronouncement: “We want to cooperate with China in all domains as much as possible, but we have to confront [China] if we must.”

Both sentiments prompted a stinging rebuke from China’s most senior representative at the Singapore gathering. Admiral Sun Jianguo criticised a “Cold War mentality” and retorted to Carter: “We were not isolated in the past, we are not isolated now, and we will not be isolated in the future.”

Sun then blamed the US for worsening disputes by “openly showing its military muscle” and told the audience “China firmly opposes such behaviour. We do not make trouble but we have no fear of trouble.”

Chinese state media was at pains to play down talk of isolation. The China Daily even ran the contrary headline “Beijing’s support circle grows larger at Dialogue” and cited an incident in which Admiral Sun hugged New Zealand’s Defence Minister Gerry Brownlee in front of photographers and exclaimed, “My friend!” Indeed, Sun breezily told China Daily: “Everyone was friendly towards us and trusted us.”

However, also from China came a looming threat – not only that it would not recognise the Hague verdict but that it would respond to it by declaring an Air Defence Identification Zone (ADIZ) over the territory in question. An ADIZ, of course, implies sovereignty over that airspace and hampers others’ freedom to fly there. In a written response to the South China Morning Post, China’s defence ministry said it was “the right of a sovereign state” to designate an ADIZ. “Regarding when to declare such a zone, it will depend on whether China is facing security threats from the air, and what the level of the air safety threat is,” the statement said.

The US has already refused to recognise another Chinese ADIZ, defiantly flying a bomber through it in late 2013 (that ADIZ was declared above maritime territory disputed with Japan; see WiC218).

To complicate matters further Taiwan’s new defence minister weighed in on Monday saying that the island would not recognise any air defence zone declared by China over the South China Sea. Taiwan’s top security agency also warned that such a move could usher in a wave of regional tension.

As Chinese and US officials met again at the S&ED these positions showed no signs of softening. In a sign that a deal on the South China Sea was off the table, President Xi Jinping made the remark: “Some differences cannot be solved at the moment.”

He may believe time is on China’s side. Indeed, the Financial Times noted that China’s strategy has so far been vindicated, if only in a realpolitik sense. “China has succeeded in changing the status quo in these resource-rich waters,” commented the FT, noting that one European diplomat had told it: “Last year everyone was warning about the threat from China’s island building plans, but they’ve now constructed runways for fighters, ports and radar facilities in the South China Sea. They’ve altered the facts on the water and there is nothing anyone can do about it now.”

Issue two: North Korea

The Wall Street Journal noted that “new developments concerning North Korea will represent another source of strain at this week’s talks. The US and China partnered earlier this year to enact tough sanctions on Pyongyang in response to continued arms and nuclear tests. But in a move that will add to the tension between the two powers, Washington took additional steps last week to further isolate North Korea from the global financial system that could bring Beijing and Washington into direct economic conflict. Pyongyang’s biggest trading partner—China—likely will feel the effects.”

Behind closed doors at the S&ED, both sides will have adopted radically different negotiating postures. US officials will have been trying to get a commitment from Beijing to increase the pressure on Pyongyang to denuclearise. On the Chinese side the priority would have been somewhat different – seeking an assurance from the US not to install a missile defence system in South Korea. Carter had earlier told the press that China had no say in this matter as it was an “alliance decision” – since Seoul needed to defend against its increasingly unpredictable northern neighbour’s warheads. Beijing, on the other hand, thinks the THAAD system could be used to spy on China and worries it could also shoot down planes in Chinese airspace.

So as with the South China Sea, the dialogue on the Korean peninsula was likely terse – although the SCMP did say that China pledged on Tuesday to enforce the sanctions previously agreed with the US.

Issue three: economic disputes

In previous S&EDs one of the central criticisms levelled at the Chinese side was of an undervalued currency.

That was not the case this year. Chinese officials repeatedly pledged during the two-day talks that they saw no need for sustained weakening of the renminbi. In one of the more substantial outcomes from this S&ED, China has also given a Rmb250 billion ($38 billion) investment quota to American financial firms to buy Chinese stocks and bonds (via the so-called RQFII scheme). Similar quotas have been allocated to several other countries including the UK and Singapore but this would be the biggest given to a single jurisdiction, after Hong Kong.

But when it came to criticism, this time the US government honed in on the massive overcapacity besetting many Chinese industries – steelmaking being the most high profile instance. The US has accused China of dumping its excess steel capacity abroad at low prices (causing steel mills elsewhere to close, such as Port Talbot in Wales) and responded with tariffs.

Underlying this argument is the view in the US that China should not qualify for the WTO’s ‘market economy’ status, even though 15 years after its entry to that organisation Beijing believes it is eligible. “Excess capacity has a distorting and damaging effect on global markets,” Treasury Secretary Jack Lew told the S&ED, “and implementing policies to substantially reduce production in a range of sectors suffering from overcapacity, including steel and aluminium, is critical to the function and stability of international markets.”

Beijing hit back. The FT said it dismissed Lew’s ‘hype’ over the overcapacity theme in its “latest war of words with Washington”. It also pointed out that Lou Jiwei, China’s finance minister, showed “a rare display of anger at the US criticism”. Lou noted that China’s steel overcapacity was accumulated during the post-crisis period when Beijing launched a Rmb4 trillion ($609 billion) infrastructure-led investment drive, and said that the Chinese economy contributed more than half of global growth between 2009 and 2011. “At the time, the whole world was grateful that China had boosted world growth. Now the world is pointing its finger at China’s overcapacity problem, saying it’s dragging down the whole world. What about what the world was saying before?”

This Lew-on-Lou battle was probably the rhetorical highlight of the two-day event, but did all the talk on the economy lead to any other more substantive gains?

Those with a longish memory will recall that the S&ED was originally conceived by one of Lew’s predecessors, Hank Paulson. One of his chief goals for the S&ED was to agree a bilateral investment treaty. In the ensuing years this has stalled owing to the number of sectors Beijing has wanted to keep off limits to foreign investment. That so-called negative list currently numbers 40 sectors, a figure the US has pressed to be cut back. Any gains on this score? Vice Premier Wang Yang did confirm Beijing would present Washington with a new list next week, and promising a further round of negotiations soon. HSBC analyst Jing Li noted on Wednesday: “We believe this signals a strong willingness for both parties to finalise the negotiation.”

Such an outcome would be a boon for M&A and represents one of the few concrete areas where the two sides could improve ties ahead of this year’s US presidential election.

But is China taking a harder line?

“Hide brightness, nourish obscurity” was Deng Xiaoping’s foreign policy maxim – i.e. keep a low profile abroad, and focus instead on building up the nation’s economic strength. But for the past few years Deng’s approach has been less evident as China’s diplomats have become more strident.

Ahead of the S&ED this became apparent once again when China’s foreign minister Wang Yi lost his temper at a press conference in Canada. He visibly bristled when the subject of human rights was raised by a local journalist and chided: “Your question is full of prejudice against China and arrogance … I don’t know where that comes from. This is totally unacceptable.”

In a angry tone he added: “Do you know that China has lifted more than 600 million people out of poverty? And do you know that China is now the second-largest economy in the world from a very low foundation? … And do you know China has written protection and promotion of human rights into our constitution?”

His rant last week went global, but was odd for a variety of reasons. First the journalist’s question was not even addressed to him, but to Canada’s foreign affairs minister Stephanie Dion – instead Wang chose to answer it and display how offended he was. Secondly, it is not the first time a senior Chinese has been asked about human rights while travelling overseas. The previous answers have betrayed little or no emotion and been more formulaic.

This has led some analysts to speculate whether Wang’s outburst was deliberate – designed to show that a harder edge is creeping into Chinese foreign policy.

Most media outlets in China remained silent on the incident but a popular WeChat account linked to People’s Daily did make this point: “China’s diplomatic language has been littered with terms such as ‘deeply regret’ and ‘strongly oppose’, are expressions with no strength. Wang Yi’s reaction this time has let the world see the change in China’s diplomatic style… In the past we never took the lead… China needs more diplomats with a strong character like Wang Yi.”

Are China and the US merely agreeing to disagree?

President Xi was in a more soothing mood than his foreign minister (or his finance minister) telling his US guests at the S&ED they should establish “fundamental strategic mutual trust”.

“There is no reason to be scared of having differences, the key is not to adopt a confrontational attitude towards any differences,” he added.

While some Americans will have regarded Xi’s remarks as rather heavy on the platitudes, it is clear that his intent was to smooth things over rather than rile.

Indeed, he probably had an eye onan event he considers of far greater significance than this year’s S&ED, namely the G20 meeting of world leaders that China will host in Hangzhou in September.

Xi will want this to be a diplomatic success. Indeed, China Daily reported on its front page on Wednesday that Xi told Kerry that “he expects to exchange views on key issues with Barack Obama during the G20”, suggesting any breakthroughs in 2016 will be reserved for Hangzhou.

That may explain why the S&ED turned out to be a relatively muted affair. The Wall Street Journal characterised it as making “little headway” and said that “statements by officials from both sides on Tuesday [when the S&ED concluded] suggested mostly incremental results from the dialogue… and little progress on disagreements”.

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