by Nina Easton

Small concessions, and tactful talk

Legislators hoping for a breakthrough in U.S.- China trade talks were disappointed, again, reports Fortune's Nina Easton.

By Nina Easton, Fortune Washington bureau chief

WASHINGTON (Fortune) -- Question: What do you get when you put 16 sure-minded Chinese officials in a chandeliered room with a dozen lame-duck Republicans?

Answer: A handful of mini-deals designed to stave off angry Democrats controlling Congress.


Wish both sides good luck, because they'll need it.

Treasury Secretary Hank Paulson closed out his second installment of the Strategic Economic Dialogue with China at a federal building here Wednesday, keenly aware that the key decision-makers resided at the other end of Constitution Avenue, inside the leadership offices of the U.S. Capitol.

"We intentionally scheduled this meeting when Congress was in session," said Paulson, who launched this series of high-level talks in Beijing last December.

For her part, Vice Premier Wu Yi clearly had Congress in mind as she declared that "politicization" of economic issues "will not help at all" and called for "direct consultation and dialogue between us, instead of easy resort to threat or sanctions."

Hours later, she and her colleagues were meeting with congressional leaders on Capitol Hill, where China has become the chief target of the very threats and sanctions that Ms. Wu fears.

Democratic House Speaker Nancy Pelosi issued a terse statement following her afternoon meeting with the vice premier, saying the pair engaged in an "open and frank dialogue on issues such as intellectual property rights violations, the undervaluation of China's currency, the genocide in Darfur and human rights in China and Tibet.

" I believe that the Chinese government can do more in each of these areas," Pelosi pointedly added.

In addition, the two senior members of the House Ways and Means Committee issued a letter to Wu complaining about China's "massive and constant interventions in the currency markets" and its "inability to enforce intellectual property rights."

"The Chinese are clearly feeling the heat. That's why they have widened the daily trading band of the yuan," Minxin Pei, senior associate at the Carnegie Endowment for International Peace said in a reference to the most contentious economic issue between the two nations - China's currency valuation. "But tougher times are ahead."

That's because Democratic lawmakers see China as a symbol of their concerns that Americans are getting shorted in the global economic marketplace. And now that they're in control they're determined to do something about it. But even Republican lawmakers are joining efforts to force Beijing to revalue its currency and slow down the spigot of cheap imports that contributes to its skyrocketing trade surplus.

A major breakthrough during Paulson's high-level talks might have warmed the atmosphere for Wu and her team as they tried to convince congressional leaders to back off. But her peace offerings were "pretty thin," as one official close to the talks put it.

"Congress is only going to be assuaged by big game," said this official. "I don't think this nickel and dime stuff is going to do it.

That's not to diminish the accomplishments of this week's two-day SED talks. The U.S. aviation industry stands to gain from an accord to double daily passenger flights to China by 2012, and to lift restrictions on air cargo carriers. Negotiations will now begin on boosting tourism to China. A few restrictions are being lifted on U.S. securities firms and banks operating in China. And in a move to get the Chinese to save less and spend more, the Department of Labor will sign letters-of-understanding with China to promote social safety nets, including employer-provided pensions and unemployment insurance.

But the major issues the SED talks were expected to address - protection of intellectual property rights, substantial opening of Chinese markets to American firms, and a currency policy that will improve the U.S.-China trade imbalance - remain unsolved.

Wu euphemistically calls these issues "hot spots" in the U.S.-China relationship. And the words of Bush administration officials at the close of the talks suggested there hadn't been much progress.

On protecting intellectual property rights: "The Chinese have passed tougher laws," said Commerce Secretary Carlos M. Gutierrez. "Now is the time for enforcement of tougher laws."

On World Trade Organization complaints: "Suffice it to say we had a healthy exchange of views," Trade Ambassador Susan Schwab said with a smile.

On currency: "The pace of change has picked up but I believe it's in their best interest and the world's best interest to move more quickly," said Paulson.

Part of the problem is a U.S.-China culture clash. American officials, led by China-hand Paulson, have viewed the SED talks partly as way to guide China into the global marketplace on Western terms. "We will encourage China to accelerate the development of their financial markets infrastructure in order to support sustainable economic growth - growth that will bring benefits to many nations," Paulson said last fall.

But the Chinese took this as an opportunity to explain their country and their policies. Last December, Vice Premier Wu took the opportunity to admonish American officials for their ignorance of China and its dynamic economic history.

American officials were hoping for give-and-take talks; the Chinese showed up with scripted presentations. Both sides are slowly moving past these cultural barriers.

Beijing's biggest relationship problem lies not with the Bush administration, but with Congress, where Democrats - who routinely condemn Paulson's boss for riding roughshod on the world stage - now accuse Paulson himself of being too diplomatic.

Power play is a new weekly column on business and politics by Fortune Washington Bureau Chief Nina Easton. Top of page