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USTR Froman Criticizes China’s “Unsustainable” Economic Policies

When China’s President Xi Jinping visits Washington, D.C. this week, conversations could air on the contentious side now that the U.S. has made clear its not-quite-favorable opinions on China’s present policies.

United States Trade Representative Michael Froman wasn’t shy about his fault-finding with China’s practices during the Center for Strategic and International Studies (CSIS) Asian Architecture Conference Tuesday—he called the country’s current model unsustainable.

China may have done well to grow its economy over the last 30 years, with market-based reforms and greater openness to trade fueling growth and productivity increases, but now the nation is at an inflection point, according to Froman.

The country’s reform and development of a market-based domestic economy has slowed in the last decade, poor intellectual property standards have persisted, information controls have devalued investments in technology, and over-investment in property has created high levels of debt, over-capacity and market volatility.

“What is certain is that China’s current model is not sustainable. The model that helped China succeed during the past three decades cannot deliver the kind of success China needs during the next three decades,” Froman said. “Looking forward, China needs to accelerate its transition from investment-led to consumer-led growth, from over-investment in heavy, export-dependent industries to the liberalization of services. Whether or not it does so will mean the difference between muddling through a slowdown and charting a course for long-term, sustainable growth.”

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For China to get it right, according to Froman, it will need to transition to a more open and market-based economy. But in light of China’s slowing economy—which the Asian Development Bank forecast to reach just 6.8% GDP growth this year—some are starting to wonder whether China can and will follow through on necessary reforms like state-owned enterprise and pro-growth fiscal policies, legal reforms to boost investor confidence and other structural reforms.

“In some important areas, there is a troubling gap between China’s official objectives and its actions,” Froman said. “In particular, China’s Third Plenum objective of a more open attitude to trade and investment, a commitment to allow the market to play a decisive role, doesn’t square with what we’re seeing in a number of areas.”

The Ambassador pointed to three things that don’t jive with what the country claims are its objectives: making the transfer of technology, intellectual property or user data a “de facto” condition of doing business in China; putting investment screens in place to help the country’s economic safety concerns; and overly-broad anti-monopoly laws.

“In today’s climate – one of slowing growth and increasing volatility, rising doubts and questions about confidence – it is all the more important that China sends clear signals about its economic policy intentions,” Froman noted.

He added that the U.S. Bilateral Investment Treaty (BIT) with China is one major avenue for China to engage on domestic reform efforts. Both parties have made “important progress” in the negotiations over the past 20 months toward improving the investment environment.

“The BIT provides an important opportunity for China to send a clear and positive signal, to reaffirm its commitment to reform and to help strengthen confidence in China’s market and investment environment,” Froman said. “In order to conclude the BIT, it’s going to need to be a high-standard agreement.”

The Ambassador also touched on the pending Trans-Pacific Partnership (TPP)—noting that the 12-nation trade agreement is “close” to conclusion. Following a ministerial meeting in Maui last month, the USTR said negotiators made progress on market access for goods, services, investment, government procurement, and toward completing an investment chapter the protects Americans from facing unfair discrimination in doing business abroad. Only a “limited number” of outstanding issues reportedly remain.