November 7, 2011 / 7:36 PM / 6 years ago

U.S. seeks to manage global economic shift to China

Chinese and U.S. flags are arranged during the third annual U.S.-China Strategic and Economic Dialogue (S&ED) at the State Department in Washington May 9, 2011.Kevin Lamarque

WASHINGTON (Reuters) - The United States must develop new transpacific trade and investment agreements to channel China's huge economic power into a "rules-based" international system that benefits all, a top State Department official said on Monday.

As President Barack Obama prepares for two Asia-Pacific summits next week, Undersecretary of State Robert Hormats said the global economic shift toward Asia had highlighted new challenges as Washington's budget crunch prompts questions about U.S. economic and political strength.

"There's competition between the American economic model and the more state-centered economic model of China and other countries," Hormats told the Reuters Washington Summit.

"What is very important as we look at ourselves and our relationship to the world is to demonstrate that our economic model continues to work and continues to deliver," he said.

Hormats, the top U.S. diplomat for international economic policy, said Beijing's influence was rising around the world including in Europe, where officials hope China may support a European bailout fund by investing some of its $3.2 trillion in foreign exchange reserves.

Washington would not see a Chinese rescue plan as a threat, Hormats said, but hoped European leaders would not make concessions on economic or foreign policy principles to tap into Chinese largesse.

"The Europeans are going to have to decide what commitments or what concessions they want to make in order to get this money," he said, speaking at Reuters' Washington office. "They are quite aware that money doesn't come free in this world and they have to make the judgment as to the right balance."

The notion that China and other major emerging economic powers might ride to Europe's rescue demonstrates the relative decline in U.S. economic influence as Washington struggles to get its finances in order, chop back U.S. budget deficits and bring down an unemployment rate riding at about 9 percent.

A special U.S. congressional committee charged with finding some $1.2 trillion in deficit reductions over the next 10 years faces a November 23 deadline. Otherwise, automatic cuts to U.S. defense and domestic spending will kick in that analysts say could further weaken the U.S. economic position and raise questions about American political gridlock.

Beijing, by contrast, has seen year after year of powerful economic growth -- adding luster to its model of a government-directed economy.

Setting the Rules

Hormats said U.S. policymakers hoped to strengthen existing international frameworks such as the World Trade Organization and form new ones such as the U.S.-backed Transpacific Partnership free trade deal now being negotiated by nine Asia-Pacific countries.

The TPP in particular is expected to be in focus as Obama hosts the Asia Pacific Economic Cooperation summit in Hawaii on November 12-13 and later at the East Asia Summit in Bali on Nov 18-19.

Hormats said the TPP, which now involves talks among the United States, Australia, New Zealand, Brunei, Vietnam, Malaysia, Singapore, Chile and Peru, could cover issues that have bedeviled the U.S.-China economic relationship including the role of state-controlled enterprises, protection of intellectual property and protection of labor rights.

"While China is not in it, if we have high enough principles and practices in it, it will give a signal to China that other countries are playing by a higher set of international rules," he said.

The United States also hopes to use the WTO to win greater Chinese compliance on issues such as government procurement rules and state subsidies, saying that while Beijing has promised to make changes it has often failed to deliver.

"We have a challenge in dealing with China. On one hand, the global system won't work well if we and China can't cooperate and productively resolve our differences. On the other hand, we have real differences, many of which are awfully difficult to resolve," he said.

"If they're going to be supportive of the system on which they're increasingly dependent, they're going to have to go beyond just reaching agreements in individual meetings to making the internal changes that are required."

As China increases its economic activity, other countries will increasingly join the United States in pushing Beijing to play by internationally accepted rules, Hormats said.

"China is playing a much more proactive role in advocating its economic model around the world -- whether it's wise for other countries to adopt it is another matter," Hormats said. "When you realize you're competing against the country in the world with the deepest pockets it may not be such an attractive model."

Reporting by Andrew Quinn, Arshad Mohammed, Paul Eckert, Glenn Somerville, Tim Ahmann, William Schomberg, Warren Strobel and Martin Howell Editing by Jackie Frank

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