COMMENTARY
Commentary: Another Round for the SED
June 13, 2008
Christopher Bjorke

The latest session of the Strategic Economic Dialogue between the United States and China meets in Maryland next week, and the hopes for progress are, as usual, complicated by reality.

U.S. Treasury Secretary Henry Paulson laid out his goals for the coming SED meeting in a speech on June 10. He repeated the U.S. demand for a stronger yuan, which has appreciated at a brisk pace so far this year, but he also called for cooperation on energy and environmental problems-which, by no coincidence, would include lower tariffs on anti-pollution technology.

Chinese Premier Wen Jiabao also welcomed the SED this week by applauding the countries' cooperation so far and by stressing China's concerns over U.S. barriers against Chinese exports and investments.

Both countries have their share of problems at the moment. The U.S. is still trying to hold off recession, move past a credit crisis and eat big increases in food and gas prices. China is trying to manage inflation and a slumping stock market, while recovering from a historic earthquake and prepare for the 2008 Olympics.

Currency, energy

Increasing the value of the yuan has been a top U.S. priority since before the SED began in 2006. Although China is still cautious about appreciation, its inflation troubles are making it increasingly inevitable.

Beijing, always wary of civic discontent, is naturally nervous about what will happen if citizens become tired of their wages purchasing less and less. Allowing the currency to gain against the dollar would increase purchasing power at a time when everything is becoming more expensive, including Chinese-made products.

Bloomberg reported this week that China's producer-price index is up 8.2% from a year ago, which means that it is losing its edge as the cheapest production site around. Shifting to a domestically driven consumer economy would eliminate some of the need for a weak yuan, by switching spending from Americans to Chinese.

Two other areas where China needs to change course are in energy and the environment. The dismal environmental conditions are obvious to those who live there, and will become more evident to the world when Olympians have to compete in Beijing's sooty air. Breaking free of price controls on energy could promote greater efficiency and reduce the damage to the country's air and water-and boost exports of industrial technology from the United States.

But cutting energy subsidies will be painful, and so will be allowing the currency to find its natural value against the dollar. Both have been important components of the export-led economy that has made China the economic giant it is. With Beijing's plate full with recovery from the Sichuan earthquake and preparing for the summer games, it might be overly optimistic to expect much progress from this round of the SED.

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