Later this month Washington will witness one of the most remarkable events in recent US-China relations. Scores of Chinese ministers, senior officials, and lesser retinue members will arrive in the city for the second round of the Strategic Economic Dialogue (SED).
Other than the occasional US-China summit in Washington – President Bush has hosted his Chinese counterpart only once – nothing of this scale has been seen along the Potomac for quite some time.
As such, high profile attentiveness and expectations will abound, especially on Capitol Hill, with increasing pressure on the White House to "do something" to strengthen America's economic hand with China.
Meanwhile, the Bush administration, knowing any major breakthroughs will be difficult at best, is working to keep expectations low – but not too low. Beijing is also frustrated and expects to get some credit for recent steps in protecting intellectual property rights (IPR) and slightly revaluing its currency.
Unfortunately, it looks like no one is going to come out of the SED all that happy.
Turning the screw
The political dance of expectations began months ago. Senators Schumer and Graham took on the role of bad cop by wheeling out their legislation that that would slap a 29% tariff on all Chinese imports. Other bills of greater and lesser magnitude and wisdom are waiting in the wings, but most are good for political ventilation only and have little likelihood of passage into law.
It might not stay this way, though.
Given the new Democrat-led Congress, growing protectionist sentiment, rising US-China trade tensions, and the 2008 election cycle, there remains a strong possibility of legislative action against China in the coming months.
This could result in steps to mandate countervailing duties against non-market economies such as China, or force renminbi revaluation with a sharpened version of the bill proposed by Senators Baucus and Grassley in 2006. Such action becomes ever more likely if the SED meeting in Washington falls short of heightened expectations.
Seeing this train coming, the administration has for many months sought to sidetrack Congressional displeasure and take measures against China in the run up to the SED.
At the end of March, the Commerce Department imposed countervailing duties on certain Chinese paper products – in effect defining China more sharply as a market economy.
Then last month, the US Trade Representative (USTR) went to the WTO calling for dispute resolution consultations with China over the country's vast problem with IPR violations.
This did not sit well with Beijing, which believes it has taken important steps in recent months to improve its IPR record in the software and pharmaceutical sectors, and in strengthening penalties for audio-visual counterfeiting.
In the end, it is a tricky two-level game played by the negotiators on both sides.
Both need to carefully bear their domestic audiences in mind and not look too soft. The political standing of the USTR in the eyes of Congress – especially as USTR Susan Schwab pursues completion of the Doha round on global trade harmonization – is particularly important in this environment.
But both sides also need to work with one another to avoid descent into a trade war – precisely what the SED is designed to avoid.
However, the situation looks less and less promising. With Chinese foot-dragging on the one hand and growing protectionist sentiment in the US on the other, negotiators on both sides will be all the more under pressure to achieve some narrow economic "victories", thereby diminishing the possibility of achieving any.
Much else will be discussed in the SED and new agreements no doubt will be reached in areas such as health care cooperation, science and technology collaboration, joint environmental protection and energy efficiency initiatives. But on the core issues of concern for the SED – alleviating rising economic tensions in US-China relations – the situation does not look good.
The less success we see in the SED, the more likely Congress will feel compelled to take legislative action. Looks like it could be a long and heated summer in Washington and Beijing.