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C O N F I D E N T I A L SECTION 01 OF 07 BEIJING 000231 SIPDIS STATE FOR E, EAP, EAP/CM STATE FOR EEB/TPP WCRAFT, CLAYTON HAYS, HHELM STATE FOR H/BETSY FITZGERALD, EAP/CM SHAWN FLATT,SCA/RA JOHN SIPLSBURY STATE PASS USTR FOR DMARANTIS, TREIF, TIM STRATFORD, ANN MAIN, JEAN GRIER DOC FOR IRA KASOFF, NICOLE MELCHER (5130), MAC (4420), IA CSHOWERS (5120) TREASURY FOR OASIA/DOHNER/WINSHIP GENEVA PASS USTR NSC FOR MFROMAN, DBELL WHITE HOUSE FOR DAXELROD, NSC PLEASE PASS TO NEC LSUMMERS E.O. 12958: DECL: 01/28/2019 TAGS: ETRD, EFIN, ECON, PREL, WTRO, CH SUBJECT: BUILDING U.S. JOBS BY LEVERAGING CHINA,S GROWTH Classified By: Ambassador Jon M. Huntsman for reasons 1.4 (b), (d) and (e). 1.(C) SUMMARY. We face a challenging year ahead in U.S.-China relations. Ten percent U.S. unemployment coupled with our huge trade deficit with China, China,s increasing use of industrial policies to restrict market access, and an undervalued RMB, will bring greater tension to bilateral ties. The Google case adds fuel to the fire. In this context, it is critical that we find ways to better advance our bilateral economic policy. This will require sustained, focused interaction on a daily basis with the Chinese, but also serious thinking about what can best be accomplished in the run-up to and at key meetings like the S&ED and JCCT. We need to find ways to keep the relationship positive, but even more important to ensure the American worker, in particular, reaps the benefits of our bilateral economic engagement. 2.(C) We offer below some ideas on how we can move ahead on a concerted, targeted U.S. effort to boost U.S. job-creating exports of goods and services to China as well as increased job-creating Chinese investment and tourism to the United States. While we will continue to aggressively negotiate removal of Chinese barriers, we will need as well to get Chinese buy-in to several job-boosting initiatives. There are even things we can do ourselves unilaterally. Taken together, measures would include: - expanding sector-specific public private partnerships, - offering SMEs China-specific support, - building or retooling existing export promotion mechanisms, - making educational offerings in the U.S. more attractive (and in the process giving new generations of Chinese a reason for wanting to be in the U.S. market), - increasing pull factors for Chinese tourism to and investment in the U.S., and - enhancing the use of the Internet and other electronic means of communication in Chinese. 3.(C) We are aware that in a resource constrained environment, some of these will cost money, but we judge that the benefits will outweigh the costs and have a significant job-creating component. Some suggestions may be more palatable than others, and costs will vary widely, but we emphasize again that the potential benefits of each are substantial. Of course we need to do a better job in helping Americans understand that the China trade relationship can actually be a good story for U.S. jobs and pay dividends far beyond the trade sector. One final note: we accent the positive here in terms of what we can do but we certainly do not neglect that the continuing need to use available trade remedies and WTO consistent retaliatory action to ensure fairness and transparency. END SUMMARY. A ROUGH YEAR AHEAD, BUT OPPORTUNITIES ARE ENORMOUS --------------------------------------------- ----- 4.(C) Whereas 2009 was a year to build the U.S.-China relationship, 2010 will be a year that tests it. Strong Chinese economic and export growth coupled with an artificially undervalued RMB will further heighten focus on our huge trade deficit with China. Widespread perceptions that China,s industrial policies are rolling back market access add to the overall sense that China plays unfairly in the global marketplace. Other emerging issues, like Google,s problems and new rules on indigenous innovation, create a drumbeat of bad news stories for firms seeking to do BEIJING 00000231 002 OF 007 business in China. And as backdrop, the Chinese continue to signal intense displeasure with U.S. positions on issues from the Dalai Lama to Taiwan arms sales and Internet freedom, which they then cite as reasons why they may not cooperate with the U.S. on other issues. 5.(C) Yet, with ten percent U.S. unemployment, more than ever before we must ensure that our relations with China continue to pay real dividends -- especially in creating jobs for Americans. China is the world,s fastest growing major economy and should be providing opportunities for U.S. goods and services exports. Chinese companies, thanks to government-backed loans, monopolies and preferential treatment, are awash in cash and should be a source for investment in the U.S. economy -- investment that would help maintain and create jobs in the U.S. And, China,s rapidly growing middle and upper classes, while still only representing a fraction of its population, measure many tens of millions. They should provide an enormous pool of potential consumers of U.S. goods and services as well as tourism and education in the U.S. 6.(C) Virtually every major U.S. company has a presence in China. They recognize the potential and are trying hard to work around the obstacles to market access that China erects. For many of them, China was their sole profit-center during last year,s global economic downturn. However, for the small and medium-sized enterprises (SMEs) that are the engine of job creation in the United States, exporting to or doing business in China is still a daunting prospect. Overt market access barriers and regulatory constraints at the national and sub-national level increasingly and blatantly tilt the playing field to Chinese companies' advantage. Chinese policies make it difficult to succeed in its market unless you establish a local presence, including production, something for which SMEs generally have neither the capital nor expertise. The opacity of China,s legal and regulatory systems and widespread official corruption also serve as barriers to U.S. businesses -- especially SMEs -- seeking to export to, or invest in, China. The lack of effective IPR protection, import-substitution policies, standards discriminate against foreign products and create obstacles to licensing of technology, and central and provincial/local government incentives to "buy local," additionally skew the playing field against foreign firms. THE OTHER SIDE OF THE COIN: PERCEPTIONS OF U.S. DISINCENTIVES TO TRAVEL, INVESTMENT --------------------------------------------- - 7.(C) Many in China perceive the U.S. as "closed" to Chinese and Chinese companies. Chinese businesspersons looking at investment opportunities around the globe are confused and intimidated by the different investment regulations and promotional activities in the fifty U.S. states. Businesspersons, potential tourists and students remain confused by U.S. visa regulations and, particularly in contrasting them with those of our competitors in Japan and Europe, perceive them as more restrictive than they actually are, even seeing them as "hostile" to Chinese travelers. Many Chinese and some U.S. firms complain that U.S. export controls are out-dated and costing us business as Chinese buyers travel to Europe to buy the same goods or services they cannot buy from American suppliers. JOB-BOOSTING APPROACHES: PROPOSED SOLUTIONS ------------------------------------------- 8.(C) There are no easy solutions to many of these challenges. However, we offer a range of possible initiatives and policy measures for interagency consideration that could help advance our efforts to maximize job-creating benefits from our relations with China. The proposals we BEIJING 00000231 003 OF 007 offer below include ones that would require Chinese buy in as well as some that the U.S. could initiate unilaterally. They are not exhaustive nor are they intended to substitute for continued aggressive negotiation of market access, but instead are meant to provide additional complementary actions to enhance our economic relations and achieve greater benefits for the American people. WIELDING STICKS --------------- 9.(C) Recent issues related to indigenous innovation, express delivery and on-line music content, for example, underscore that USG complaints about discriminatory policies - absent a credible threat of retaliatory action or other leverage -- are falling on increasingly deaf Chinese ears. China,s relatively strong economic position in the wake of the global financial crisis has intensified that trend. As has Chinese hubris that it can call the shots and determine the playbook under which it operates without disclosing the same to foreign firms. While WTO dispute settlement has worked well when applied, many of the problems we face in China,s market do not fall within WTO disciplines. We may want to consider ways to toughen up our talking points and enhance the use -- or perception of likely use -- of other real "sticks" in order to achieve market opening, job-creating objectives. This will require some consideration of just how much disruption in our economic relations we are willing to countenance if we must carry through on threats. -- HIGHLIGHT TO CHINESE POSSIBLE CONGRESSIONAL ACTION on hot-button issues like Renminbi valuation and carbon tariffs on Chinese imports. -- EMPHASIZE THAT CHINA,S INDUSTRIAL AND EXPORT-PROMOTION POLICIES WILL PROVOKE 421 CASES to be filed and positively considered. -- COORDINATE CHINA-DIRECTED TRADE AND ECONOMIC POLICY IN BILATERAL OR MULTILATERAL SETTINGS with the EU and other trading partners, especially in Southeast Asia, that face similar challenges with China. -- CONTINUE TO PURSUE AS APPROPRIATE WTO CASES, with emphasis on sectors most closely tied to U.S. jobs. Consider possibility of using lower "probable victory" standard in deciding whether to initiate such cases. FOCUS OUR ENGAGEMENT ON JOBS ----------------------------- 10.(C) Given current U.S. unemployment levels we suggest the interagency prioritize our objectives over the next year on those areas most likely to create jobs in the U.S. In particular, we suggest: -- AN OVERARCHING FOCUS ON OPENING CHINESE MARKETS TO EXPORTS OF U.S. SERVICES in all of the key U.S.-China bilateral economic fora in 2010, including the S&ED and JCCT. For example, a strong push to eliminate joint venture requirements in select services sectors could be negotiated in exchange for a Chinese-sought concession. -- PRIORITIZE OUR "ASKS" OF CHINA ON GOODS SECTORS THAT HAVE HIGHEST JOB-CREATION POTENTIAL AND STRONG CHINESE GROWTH POTENTIAL, and intensify our advocacy in these areas through the methods outlined below. BANG FOR THE BUCK: INCREASE AND DIVERSIFY EXPORT PROMOTION --------------------------------------------- 11.(C) Since 2005, very conservative estimates show that BEIJING 00000231 004 OF 007 U.S. exports of goods to China created 285,000 jobs in the United States. In that same period, every dollar of funding for export promotion activities facilitated an average of USD 617 in exports to China. While many of the programs listed below would require either a shift in or new funding, those investments would quickly payoff. To increase U.S. exports to China in the near and medium term, it is essential that we expand and enhance existing export promotion programs, including: -- EXPAND SECTOR-SPECIFIC PUBLIC-PRIVATE PARTNERSHIPS. For example, the highly successful Aviation Cooperation Program, or ACP, was founded with support from the U.S. Trade and Development Agency (TDA). It now has over 40 corporate members, sponsored training for over 100 Chinese aviation professionals, and has introduced U.S. firms and technology throughout China,s aviation industry and regulatory structure. USG participation has helped U.S. firms build relationships with local officials that are crucial to doing business here. Likewise, an Energy Cooperation Program was established in 2009 along these same lines and healthcare is a strong candidate for immediate consideration for a similar new partnership. -- OFFER SMEs INCENTIVES TO TEST NEW MARKETS HERE. Japan, Korea, and Germany offer SMEs loans or subsidies to offset costs of travel, trade show participation, market entry, and business matchmaking. They help companies develop procurement strategies to be more price competitive. Such measures are currently proscribed under the U.S. system. -- TELL THE STATES WE ARE READY TO HELP: Present at Annual Governor's Association meeting and other state venues on Mission services to help their states connect to counterparts in China. -- ESTABLISH FEDERAL AND/OR STATE-LEVEL INCUBATOR PROGRAMS, which help companies during market entry by Leveraging public-private partnerships to support new exporters. The German government partners with the German Chamber of Commerce in supporting the German Center Beijing. For start-up companies, the Center offers office space, conference facilities, in-depth counseling and practical advice from lawyers, accountants and market and sales professionals. In-house service providers assist German companies with a full range of services helping them compete. By developing public-private partnerships that join business expertise and government assistance, the USG could offer comparable one-stop service to U.S. companies to help level the playing field with competitors. -- DUPLICATE THE "COOPERATOR" PROGRAMS of the Foreign Agricultural Service (FAS) in other sectors. FAS spends $25 million annually on cooperator programs in China to help companies create, expand and maintain long-term export markets for U.S. agricultural products. Those funds are matched by industry. TDA funds might help. -- FURTHER EXPAND FCS ACTIVITY IN CHINA, one of the most effective ways to spur export promotion. This will have a big bang for the buck in terms of across-the-board commercial outreach. -- FUND THE HIRING OF FCS EXPORT-PROMOTION CONTRACTORS IN THE 14 CHINESE SECOND-TIER CITIES that have been identified by Commerce as having the best U.S. export opportunities (these 14 cities, each of which has a population in excess of one million, currently receive 53% of all U.S. exports to China). -- CAPITALIZE ON CHINESE OUTWARD DIRECT INVESTMENT TO THIRD COUNTRIES. For example, the Embassy could organize match-making events to introduce U.S. upstream design and managerial services firms to Chinese design/build firms that BEIJING 00000231 005 OF 007 have contracts for infrastructure projects using PRC concessional loans in Asia, Africa and Latin America. -- SEEK TO REDUCE U.S. EXPORT CONTROLS ON SALES OF JOB-CREATING TECHNOLOGIES that are readily available from our allied competitors (semiconductors manufacturing equipment, microwave chambers, composite prepregs). We know that there is an ongoing discuss about export controls in the U.S. and well recognize the national security implications of how we view export controls. ENCOURAGE CHINESE INVESTMENT IN THE U.S. ---------------------------------------- 12.(C) Apart from misperceptions of an unwelcoming political Environment and periodic complaints that key high tech investments are denied routinely due to CFIUS concerns, Chinese companies view the U.S. economy as an attractive investment destination. Dispelling harmful myths and actively promoting direct Chinese investment would help us capture a larger share of China,s rapidly growing ODI levels (PRC ODI to the world roughly doubled from $27 billion in 2007 to $56 billion in 2008), which in turn would create more U.S. jobs. In this regard, the following steps should be considered: -- THE INTERNET. We should create many more Chinese language websites that are directed at key secondary and tertiary cities in China. The more we facilitate access to information about American business opportunities -- whether through a national database or enhanced state and local databases -- the better. We believe thinking local, start-ups and grassroots first is the preferable way to go in using the Internet -- ENHANCE THE ADMINISTRATION'S INVEST IN AMERICA PROGRAM. Other countries have national promotion programs that work with Chinese companies to help them identify industry clusters or target locations based on their criteria. -- DIRECT FEDERAL FUNDS TO SUPPORT STATE INVESTMENT-SPONSORED BUYING OR INVESTMENT MISSIONS originating in China. -- ADD INVESTMENT PROMOTION TO THE AGENDA OF VISITING CABINET AND OTHER HIGH-LEVEL OFFICIALS (conduct roundtables with influential Chinese business leaders who could move substantial investment to the United States). -- CONDUCT A PUBLIC DIPLOMACY CAMPAIGN to erase misperceptions about the scope of CFIUS restraints, including use of existing bilateral fora like the S&ED, Investment Forum, and JCCT and "investment missions" to provincial capitals and second-tier cities. -- EXTEND THE VALIDITY OF U.S. B-1/B-2 visas for Chinese travelers. EXPANDING TOURISM AND EDUCATIONAL TRAVEL ---------------------------------------- 13.(C) A fundamental Chinese misperception that our doors are closed constrains growth in Chinese travel to the U.S. across a wide range of categories, as does the confusing diversity of state-level programs on tourism and education. A rich and sustained effort to overcome these factors could pay rapid and substantial job-creating dividends. We need to create a buzz in the street that travel to America for business for other reasons is actually pretty easy. And that traveling in America is generally easy and without restrictions. We propose the U.S. consider: -- ESTABLISH A CHINA-SPECIFIC TRAVEL AND TOURISM AUTHORITY. BEIJING 00000231 006 OF 007 A national body to encourage the rapidly growing pool of Chinese tourists to spend leisure time in the U.S. could accelerate growth in individual travel and boost group travel. Local U.S. tourism offices need help understanding what attracts Chinese visitors. -- DUPLICATE IN OTHER FIRST-TIER CHINESE CITIES THE NATIONAL TOURISM ASSOCIATION (NTA) program office that was created in DOC,s Shanghai Commercial Center (NTA received a supporting Market Cooperator Grant). -- INCREASE THE FREQUENCY OF OUTREACH PROGRAMS to educate Chinese public on the visa process, including intense public diplomacy through media channels. The more visitors, the more money they will spend and we enhanced "see America" program will create good service sector related jobs in the travel and tourism industry. -- SEEK TO EXTEND VISA RECIPROCITY FROM ONE TO FIVE YEARS IN ALL VISA CATEGORIES. The Embassy has just negotiated the extension of visa reciprocity for select categories to five years. Expanding this to all visa categories would dramatically help promote U.S. openness to legitimate travel. (By contrast, U.S. visa reciprocity with Thailand is ten years.) -- EXPAND STATE,S EDUCATIONAL AND CULTURAL AFFAIRS INITIATIVES to provide student advising and enhance student mobility between the U.S. and China as well as to support American universities, professional and technical training efforts to bring more Chinese adult students to the United States for training. It is notable that the number of Chinese in the United States for non-university education has nearly doubled in the last few years, demonstrating that U.S. education services are sought by Chinese and are an industry in which jobs could be created. -- EXPAND FEDERAL DIRECTION AND SUPPORT TO PROMOTE community and state college recruitment of Chinese graduate and undergraduate students. -- WORK TO CHANGE CHINESE PERCEPTIONS OF THE IMPORTANCE OF UNIVERSITY RANKINGS and promote enrollment in a broader range of U.S. institutions. DANGLING CARROTS ---------------- 14.(C) Where China is already seeking assistance from us or encouraging investment, we should capitalize on that interest for job promotion. For example: -- ADVERTISE MORE EFFECTIVELY FOREIGN-FRIENDLY INVESTMENT OPPORTUNITIES IN CHINA, especially those that are already with PRC encouragement and which are tied to follow-on U.S. goods exports (current examples include mining and logistics management). -- IDENTIFY AND REDUCE USG-CREATED BARRIERS TO GROWTH IN THOSE SECTORS WITH THE MOST POTENTIAL IN CHINA. Green technologies is the most potent example. U.S. subsidies to R&D in green technologies, specifically solar panels, expire biannually. That unpredictability stymies long-term R&D by U.S. companies in the field, a detriment to their competitiveness in the industry. Establishing a long-term program for R&D would increase U.S. competitiveness. -- LEVERAGE CHINESE INTEREST IN TECHNICAL EXCHANGES WITH EPA, FDA AND OTHER REGULATORY AGENCIES to extract specific commitments on expanded market opportunities for U.S.-based services in related fields, consistent with U.S. health and safety interests. BEIJING 00000231 007 OF 007 -- RE-EXAMINE EXPORT CONTROLS ON COMMERCIALLY-IMPORTANT TECHNOLOGY being made available to China by allied competitors (i.e. semiconductor manufacturing equipment; aviation; EMC and microwave chambers). HUNTSMAN