WHILE STANDING THEIR GROUND, THE UNITED STATES AND CHINA SEEK COMMON GROUND AT APEC

WHILE STANDING THEIR GROUND, THE UNITED STATES AND CHINA SEEK COMMON GROUND AT APEC The Asia-Pacific Economic Cooperation (APEC), held in Beijing in early November, marked a pivotal moment for Chinese President Xi Jinping and U.S. President Barak Obama. For President Xi, APEC was the diplomatic equivalent of the Olympics: a coming out party to display China s emergence as a world leader. For President Obama, APEC was a chance to show he could still make progress on the global front, despite having just lost the Senate to the Republican Party back home. With issues such as cybersecurity, territorial disputes and human rights looming, expectations were low that the two presidents would be able to make progress on U.S.-China relations. However, both President Xi and President Obama did their best publicly to offer wide smiles and friendly words to reassure the world that the United States and China are striving to rebuild trust. They did this to some degree by announcing a slew of steps, most of which are promising for the business community. These areas of win-win cooperation included accelerating a U.S.-China Bilateral Investment Treaty, finalizing terms on the Information Technology Agreement, initiating new climate change commitments and liberalizing visa programs. However, the U.S.-China relationship remains fraught with complications. In President Obama s words, the two countries have agreed to expand cooperation when their interests overlap and to work to narrow those differences where possible, though some of these differences may be impossible to reconcile. Indeed, the United States and China tend to see their current relationship and future places in the world in fundamentally different ways. DEFINING THE NEW U.S.-CHINA RELATIONSHIP For over a year, President Xi has referred to the relationship between China and the United States as a new type of major power relations, lest the two countries fall prey to the Thucydides Trap, which predicts the hostile transition of power from one nation to another. The United States, however, is not quite ready to accept that it is in decline and should quietly hand over power to China. Instead, the United States supports China s rise as a responsible actor within the existing set of international systems and values, while China expects the United States to respect its right to re-frame global norms as it sees fit. President Xi envisions a new type of major power relations based on the principles of "non-confrontation, non-conflict, mutual respect, and win-win cooperation." This would exclude what China sees as US meddling when it comes to China s territory and political system. Meanwhile, President Obama appears to have backed away from China s new type of great power relations construct. Instead, the White House reiterated multiple times following APEC that the United States welcomes the continuing rise of a China that is peaceful, prosperous and stable and that plays a responsible role in the world. These responsibilities include a number of international norms to which China does not want to conform wholesale. China was not at the negotiating table when many of the current international systems were set up, so it often seeks to reshape the rules. While the United States and China worked hard to capitalize on areas of alignment at APEC, the differences in how they perceive their bilateral relationship may stymy cooperation in many areas. 2014 APCO Worldwide Inc. All rights reserved Page 1

COMPETING ON TRADE As China and the United States negotiated their bilateral relationship at APEC, the meeting also became a battleground for primacy in the region, vis-à-vis trade relations. Both countries vied for support for their respective regional trade plans: U.S.-led Trans-Pacific Partnership (TPP) and the China-led Free Trade Area of the Asia-Pacific (FTAAP) and New Silk Road plan. China was not invited to participate in the U.S.-led TPP, a trade agreement under negotiation among 12 nations who make up 40 percent of global GDP, because China s willingness and ability to meet terms regarding state-owned enterprises (SOE) was unlikely. In response, China labeled the treaty as part of America s containment strategy but also started paying close attention to the negotiations. In recent months, top Chinese officials have signaled interest in joining. It is unlikely China will be able to join before the TPP terms are set, however China s SOE reform ambitions mean there could be a slim possibility that it would seek TPP participation late in the game. China is also focusing on its own set of regional trade deals, including the Free Trade Area of the Asia-Pacific (FTAAP) and New Silk Road development scheme. China pushed hard for the FTAAP during APEC, only to meet opposition from the United States, concerned FTAAP could slow the momentum of TPP. In the end, APEC countries made a tepid commitment to a feasibility study of the FTAAP, with the caveat that the FTAAP would be based on current and developing regional architectures, indicating that the TPP retained precedence. China also shopped its New Silk Road development plan, which includes a proposed trade route from China through central Asia and ending in Europe, an infrastructure investment fund and a new regional development bank. The plan represents a Chinese pivot away from trade dependence on the United States, Japan and Europe and toward infrastructure and investment that will help build future markets for China, as well as increased economic and political influence in Southeast Asia, Central Asia, the Middle East, Eastern Europe, Eastern Africa and India. The United States has been far from supportive, having allegedly discouraged countries from signing on to China s Asian Infrastructure Investment Bank (AIIB), a key part of the plan. Although the United States and China will continue to compete for influence in Asia through trade, APEC showed that trade agreements with or without China are not a zero-sum game. China demonstrated its new willingness to meet the high standards set in the Information Technology Agreement (ITA) negotiations, proof that U.S.-China cooperation on trade has great potential to grow as China s economy matures. In addition, the United States and China have committed to accelerating work on a Bilateral Investment Treaty, and China is also negotiating similar agreements with the European Union. As the United States and China build consensus on previous trade policy impasses, they will be able to bring each other into more regional and global deals, enlarging the pie for everyone. CHINA S ASCENT, AMERICA S DESCENT? The peaceful and even friendly transition of power from Great Britain to the United States in the 19th and 20th centuries was rife with vagaries and intrigues, and there are echoes of that dynamic in the U.S.-China relationship today. In 1823, a growing United States published the Monroe Doctrine, warning European powers not to interfere with the North and South American countries in its backyard. Years of small diplomatic skirmishes ensued with the United Kingdom and the United States vying for influence over the region. Often the United Kingdom negotiated generous terms and prioritized friendship with the United States over its own interests in the region. Both shared such close histories and values that the two countries saw more benefit in friendship than enmity, and that friendship continues today. 2014 APCO Worldwide Inc. All rights reserved Page 2

President Obama has said America encourages China s peaceful rise and leadership. With the FTAAP and New Silk Road schemes, China is attempting to begin to take on a larger, more positive leadership role in the region, one that will realize the Asia-Pacific Dream, in President Xi s words. Many questions remain about how exactly China envisions its role in the world, and what roles it envisions for the other Asian nations and the United States. The China Dream is often described as the great rejuvenation of the Chinese nation, but with 5,000 years of history, it would be helpful to know to which China President Xi aspires. APEC showed a friendly Xi, ready to work together with China s Asian neighbors; he still needs to further clarify China s vision for the world, but this is a good start. China s plans for itself, the region and the world are still unclear, but given the historical and cultural gaps between both countries, a bilateral relationship based on trust and understanding can only be built with small leaps of faith on both sides. This will take real imagination and new thinking from both countries, as well as willingness to compromise and cooperate. If the United States and China are able to imagine a shared future based on a new U.S.-China relationship, their shared impact on global trade and stability would be limitless. APEC HIGHLIGHTS FOR BUSINESS Despite the complexity of the regional relations, the APEC meeting represents a trend of stronger regional integration. Investing in, trading with, and visiting China will likely become easier for foreign business. Bilateral Investment Treaty The United States and China said they would prioritize speeding up negotiations of the Bilateral Investment Treaty (BIT), which would put in place rules governing foreign investment policy in both countries. The two countries aim to settle the core issues in the draft BIT and begin negotiating the negative list in 2015, and have not yet set a timetable for completion. To reach an agreement, China will likely have to significantly pare down its list of banned and restricted industries for foreign investment, considerably opening up certain industries. Shortly after the APEC meeting, China s Ministry of Commerce and National Development and Reform Commission (NDRC) released a draft of an expanded list of industries open for foreign investment. Companies already on the ground in China would also benefit from likely provisions in the BIT that would give foreign and domestic companies the same or more similar treatment in China. As the United States will likely push for a level playing field with state-owned enterprises (SOE) and domestic private companies, China may accelerate reform of SOEs in the near future. This would open up more opportunities for foreign companies in areas traditionally dominated by SOEs. Information Technology Agreement The APEC partners achieved a major breakthrough on negotiations to expand the Information Technology Agreement (ITA), an existing World Trade Organization (WTO) agreement that cuts tariffs on technology products. Talks broke down in July 2013 when China sought to exclude a large number of items from the tariff reductions in the treaty. The updated ITA will cover approximately $4 trillion in trade of IT goods, with key tariff eliminations or reductions on products such as household electronics, semi-conductors and medical equipment. While WTO members will still need to formally finalize and ratify the ITA later this year, China s concessions are a positive sign that it is willing to align with international standards to reach trade agreements. 2014 APCO Worldwide Inc. All rights reserved Page 3

The expansion of the ITA is undoubtedly beneficial to foreign technology companies. Once it is ratified by the WTO, these companies will be able to export their high-tech products into China with lower or no tariffs. With their technology advantage and lowered prices, they can expect a larger market in China. It is also a sign that China s own technology industry is maturing enough that the country is willing to compete more directly with foreign companies and conform to its trading partners standards. Climate Change Deal For the first time, the world s top-two carbon emitters have made concrete commitments to reduce their greenhouse gas emissions to stop climate change. The United States will reduce greenhouse gas emissions from 2005 levels by 26 to 28 percent by 2025, while China will increase its use of alternative energy to 20 percent of its total energy consumption and will reach peak carbon emissions before or by 2030. Some have dismissed the agreement since China s commitments fall closely in line with its existing energy conservation plans, and the United States ability to hold up its end of the bargain depends on an unpredictable Congress. However, the agreement is an important symbolic victory that could significantly impact global climate talks including the 2015 United Nations Climate Conference in Paris, as most countries have seen little point in agreeing to global climate change measures when the top-two contributors were unwilling to provide united leadership. Visas The United States and China have extended business and tourist visa terms for each other s citizens from one year to 10 years, and student visas to up to five years. The visa policy will not only improve ties between common Americans and Chinese, but will also offer both countries the economic benefits of increased tourism and business travel. The White House estimates that the United States visa extensions for Chinese citizens could bring $85 billion and an additional 440,000 jobs to the United States economy. Overall, the tangible agreements and general tone at APEC indicate a promising outlook for business in China. For further analysis of APEC s impact on the broader U.S.-China relationship and what it could mean for both countries future place in the world, please see APCO s analysis here. ABOUT APCO WORLDWIDE APCO Worldwide is an award-winning, independently-owned global consulting firm and leading provider of government relations, stakeholder engagement and strategic communication services in China. We have been serving clients interests in China since 1989. Today, our China team includes more than 100 professionals from a diverse range of backgrounds, including business, government, journalism, academia and civil society. We are based in well-established offices in Beijing, Shanghai and Hong Kong. As a political economy in transition, China is a complex, heavily regulated market that welcomes foreign investment while being highly protective of its developing domestic industries and transforming society. APCO Worldwide partners with clients through every aspect of their business development strategies to help t hem navigate the Chinese context, optimize and protect their investments, and maximize their returns. 2014 APCO Worldwide Inc. All rights reserved Page 4

APCO s clients include multinational firms, leading Chinese companies, governments, chambers of commerce, issue-based coalitions, multilateral organizations and nonprofit interest groups. We work daily with colleagues in APCO offices around the world to ensure consistency in servicing global clients and facilitating Sino-foreign trade and inward and outward investment. For more information, please contact: James McGregor chairman, Greater China Suite 903, Tower C Office Park No.5 Jinghua South Street Chaoyang District Beijing 100020 People s Republic of China Phone: +86.10.6505.5128 jmcgregor@apcoworldwide.com Anne Wang director Suite 903, Tower C Office Park No.5 Jinghua South Street Chaoyang District Beijing 100020 People s Republic of China Phone: +86.10.6505.5127 qwang@apcoworldwide.com Linda Du managing director Unit 301-303, Platinum Tower 233 Tai Cang Road Shanghai 200020 People s Republic of China Phone +86.21.5298.4668 ldu@apcoworldwide.com Amy Wendholt managing director 1903, 19/F Cambridge House, TaiKoo Place 979 King s Road Hong Kong Phone +852.2866.2313 awendholt@apcoworldwide.com 2014 APCO Worldwide Inc. All rights reserved Page 5