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U.S. and China Meet in Annual Military Review
BEIJING — Top American and Chinese military officials began an annual review of major issues here on Wednesday pledging to seek greater cooperation and trust in a relationship that, to many, more resembles a budding rivalry.

The Defense Consultative Talks, now in their 12th year, opened on the heels of President Obama’s pledge last month to bolster the United States’ military presence in the Pacific, a move seen by many here as aimed at countering China’s rise. And it follows a frenetic year of expansion by the Chinese military in which a new aircraft carrier and carrier jet, a new stealth fighter jet and a host of other advanced weapons were unveiled.

In remarks at China’s Defense Ministry on Wednesday, the senior Chinese officer at the talks, Gen. Ma Xiaotian, emphasized the need for both sides “to enhance communication, to expand common ground, to promote mutual understanding.”

The lead American official, Under Secretary of Defense Michèle Flournoy, expressed hope that the militaries could “agree on issues and interests that the two sides share.”

The United States and China are seeking to stabilize their usually rocky relationship at a time of domestic political uncertainty — 2012 will see a new Chinese leadership and an American presidential election — and global economic turmoil that could strain diplomatic ties between Washington and Beijing.

“I see this as a signal that bilateral relations will be conducted on less stormy waters,” Zhu Feng, the deputy director of Peking University’s Center for International and Strategic Studies, said in a telephone interview. “I don’t think either side wants to see an action-reaction cycle that turns into a new cold war.”

The government Xinhua news agency stated that the talks would touch on the United States’ recent $5.85 billion sale of weapons to Taiwan, maritime piracy and the state of regional hot spots from the Korean Peninsula to the Middle East to the South China Sea.

The annual talks sometimes set the tone for military-to-military relations in the succeeding year. In a briefing paper issued before the meeting, the Washington-based Center for Strategic and International Studies stated that one measure of success would be whether the sides agreed on a future schedule of country-to-country military exchanges.

The exchanges, including trades of visiting delegations of officers from each military, are designed to promote good will and allow future generations of military leaders to put a human face on a rival force that they may now regard only as an abstract enemy.

Arms sales to Taiwan, which China calls a breakaway province that must be reclaimed by force if needed, are perhaps the biggest obstacle to better relations between the two forces. The People’s Liberation Army suspended some exchanges in September, after the United States agreed to the arms deal with Taiwan. But the American deal — to upgrade Taiwan’s fleet of F-16s rather than sell the country 66 new-generation models of the jets — appeared calibrated to try to avert deepening strains with China.

Indeed, the P.L.A.’s reaction was tepid compared with two years ago, when another arms sale by the Obama administration plunged military ties into a yearlong deep freeze.

Mr. Obama’s new focus on the Pacific offers a broad realm for new frictions, coming as China’s military expands and revamps its navy and renews claim to territorial or economic control of much of the South China Sea.

The region has seen a series of run-ins this year between Chinese naval and other vessels and those of the Philippines and Vietnam, which also claim part or all of the sea’s hundreds of islands.

Premier Wen Jiabao last month warned unnamed “external forces” against meddling in the territorial disputes, a clear reference to the United States.

Shi Da contributed reporting.

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Japan, by comparison, no longer has any tariffs on imported cars, while South Korea has an 8 percent tariff and the European Union a 10 percent tariff. The United States, meantime, has a tariff of only 2.5 percent for imported cars, minivans and sport utility vehicles.

But the 25 percent tariff is only one reason a Grand Cherokee costs three times as much in Chongqing as in Chicago. In the name of energy conservation, China also assesses a sales tax of up to 40 percent of the vehicle’s price based on its engine size. Small, fuel-sipping Chinese cars pay the lowest rate, as little as 1 percent, while gas-guzzlers from the United States and Europe pay the highest rate.

China also collects a 17 percent value-added tax on almost everything sold in the country, whether imported or domestically produced. But like many European nations, China uses a W.T.O. provision that allows the tax to be fully refunded to China’s export producers, who often pass along the saving to foreign buyers.

What’s more, China limits foreign manufacturers to no more than 50 percent ownership of car assembly plants in China. That special rule, which China managed to negotiate for its W.T.O. accession agreement when its auto industry seemed tiny and vulnerable, has forced multinationals to set up numerous joint ventures in China and to transfer a wide range of technology to those Chinese partners.

China’s W.T.O. agreement did open many service sectors of the Chinese economy, like transportation, banking and retailing, to foreign competition.

FedEx, for example, has expanded rapidly in China and now has 9,000 employees in the country. The company also relies heavily on American-made Boeing 777-Fs, with mostly American pilots, to ferry an ever-rising tide of Chinese goods to the FedEx hub in Memphis.

And Wal-Mart has been able to open 353 retail stores in China, despite the hostility of many small, local retailers.

China’s W.T.O. agreement had some big omissions, including the thorny question of whether to let foreign companies bid on Chinese government projects — an issue that remains unresolved.

China got many of its breaks because the W.T.O. and its members, including the United States, were eager to accept it into the international trade group to encourage Beijing’s embrace of capitalism and to make it a more fully vested participant in the global community.

But trade officials say that they never expected all the terms of China’s accession agreement to last as long as they have.

Instead, China and other trading nations had expected to reduce trade barriers further in the Doha Round of global trade talks. But the talks dragged on and then effectively collapsed in 2008 — despite periodic efforts to revive it, including a meeting of ministers next week in Geneva.

While China is acutely aware of other countries’ concerns about its tariffs, it is leery of lowering them unilaterally without concessions from other countries, said He Weiwen, a council member of the China Society for W.T.O. Studies in Beijing.

For the West, the open question is whether China’s high tariffs and other market protections will be allowed to remain in place indefinitely. Just as worrisome: a few provisions in the agreement that were meant to blunt the competitive impact of Chinese exports on Western industries are starting to expire.

The most notable of these is China’s current designation under its W.T.O. agreement as a “nonmarket economy.” The label makes it fairly easy for overseas industries to accuse Chinese companies of dumping goods into their markets at prices below cost, and to seek steep tariffs on their shipments.

That is just the sort of accusation, in fact, that American solar panel manufacturers have leveled at China in a trade case pending at the Commerce Department in Washington — a case the American industry is widely expected to win.

But under the W.T.O. agreement, China will automatically be relabeled a market economy in 2016. That status will make it harder for companies in other countries to win antidumping decisions against China — and will probably clear the way for Chinese businesses to further increase their global market share.

Ideally, that could mean a lot more products like $49 microwaves on Western shelves — even if it means a Grand Cherokee from Detroit may never be affordable in China.

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China’s 10-Year Ascent to Trading Powerhouse
HONG KONG — As China heads into a weekend of speeches celebrating its 10 years as an official member of the global trade community, the rest of the world may want to contemplate the exported $49 microwave oven and the imported $85,000 Jeep Grand Cherokee.

Sunday is the 10th anniversary of China’s joining the World Trade Organization — a membership that helped turn China into the world’s biggest economy after the United States. Companies and consumers worldwide have benefited from China’s emergence as a top trading partner. And yet, because of special breaks and loopholes for China when it joined the W.T.O., it still shields its domestic markets from foreign competition much more than any other big nation.

Consider that $49 microwave oven and $85,000 Jeep.

Microwave oven prices have plunged in the West over the past decade, largely because China has combined inexpensive labor, excellent infrastructure and heavy factory investment to produce the ovens and a wide range of other consumer goods for export, making creature comforts more affordable to customers around the world.

Further, W.T.O. rules against protectionism have made it difficult for countries in the West to limit China’s sixfold surge in exports during those 10 years, even as the Chinese flood of products has forced factory closings and layoffs elsewhere.

But price tags on imported cars at dealerships in Beijing, Shanghai and other Chinese cities signal how China has continued to protect its home market under the special terms of the W.T.O. agreement it negotiated before joining the trade group.

In the United States, prices for a Detroit-made Jeep Grand Cherokee start at $27,490. But in China, after tariffs and other protective fees, it sells for $85,000 or more. (It’s no surprise that Chrysler has sold fewer than 2,500 of them so far this year in China.)

Foreign trading partners often chafe at the way China uses the W.T.O. rules to its advantage.

The Chinese economy’s “spectacular rise would not have been possible without the open global trading system that China was able to benefit from during the past 10 years,” said Karel de Gucht, the European Union’s trade commissioner.

“At the same time,” he said, “China is having to increasingly recognize and respect not only the legal responsibilities it now faces as a member of a global rules-based body, but also the W.T.O. ‘spirit’ of promoting open markets and nondiscriminatory principles.”

Chinese officials have been effusive in the run-up to their W.T.O. anniversary. “We believe that our 10-year arrangement has been successful — the results of the past 10 years are welcome and a valuable inspiration,” Yu Jianhua, China’s assistant minister of commerce, said at a news conference last month in Beijing.

The roots of China’s economic model trace to the singular terms under which the nation joined the World Trade Organization, which now has 153 members.

Based in Geneva, the group was established in 1995 as the successor to an international framework called the General Agreement on Tariffs and Trade — GATT, as it was known — that had been mapped out in the early years after World War II.

After negotiating for 15 years to be admitted to GATT and then to the W.T.O., China was finally let in after agreeing to accept the W.T.O.’s broad free trade rules. But as all new members do, Beijing also had to negotiate a lengthy document, known as an accession agreement. It spelled out thousands of details tailored to the specifics of the economy of China, which then was still very much a developing country.

The agreement required China to lower its tariffs to levels below those of many other developing countries. But compared with most industrialized countries, China was allowed to impose considerably higher tariffs — tariffs China has retained even as its economy has subsequently grown to No. 2 in the world.

The clearest example of W.T.O. ascendance China-style may be in automobiles. Even though China’s auto manufacturing industry and car market are now both the world’s largest, China continues to shelter them behind the highest trade barriers of any large industrial economy.

It retains a prohibitive tariff of 25 percent on imported cars, for example, which helps explain why imports represent only 4 percent of the light vehicles sold in China.

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China Signals Reluctance to Rescue E.U.
HONG KONG — The Chinese government over the weekend sought to tamp down international expectations that Beijing might use its large financial reserves to help ease the European debt crisis.

The two government agencies that control the reserves face heavy restrictions on their use, Chinese government officials and economists said.

“The argument that China should rescue Europe does not stand, as reserves are not managed that way,” China’s vice minister for foreign affairs, Fu Ying, said in comments prominently reported by the state news media over the weekend.

Ms. Fu’s statements were significant because Chinese diplomats and political leaders had been less publicly hostile to the idea of helping Europe than Chinese economic policy makers, who had been strongly opposed.

Her comments conspicuously echoed some of the arguments made for several months by Chinese economic policy makers.

She said that the $3.2 trillion in bonds, bills and cash held by the central bank as official foreign reserves represented national savings that were not easily disbursed.

“Foreign reserves are not domestic income or money that can be disposed of by the premier or finance minister,” she added, according to Xinhua, the state-run news agency. “Foreign reserves are akin to savings, and their liquidity should be ensured.”

Lou Jiwei, chairman and chief executive of the China Investment Corporation, a $374 billion sovereign wealth fund that is managed independently of the foreign exchange reserves, has also tried to dispel speculation that it might buy a lot of European bonds.

He suggested a week ago that his fund might invest in roads, bridges and other infrastructure projects in Europe, part of a broader Chinese interest in fixed assets, rather than helping countries finance their budget deficits.

The Chinese central bank effectively borrowed the money from the Chinese public to buy the dollars, euros and other currencies in both funds. The central bank has required commercial banks to transfer one-fifth of their domestic deposits to it and has used that money to buy $1 billion or more a day of foreign currencies to slow the appreciation of the renminbi against the dollar.

The central bank has also pressed commercial banks to buy central bank bills that pay very low rates of interest and has used the proceeds to buy dollars. These methods of financing foreign exchange reserves have left the central bank with significant domestic liabilities in renminbi to balance against whatever return it can earn on foreign bonds, making economic policy makers particularly wary of taking risks with foreign exchange reserves.

The possibility that China might buy large amounts of European Union bonds has been raised repeatedly in the last year and a half by various officials from Greece, Italy and the European Union. These officials have sought to reassure financial markets that there will be demand for European government bonds, as a way to encourage investors to continue buying those bonds and thereby hold down the interest rates that European governments pay on their debt.

The Chinese government has mostly discouraged this speculation. But Prime Minister Wen Jiabao raised hopes in Europe in mid-September when he said that China might be prepared to lend a hand if Europe were to label China a “market economy,” a designation that would make it difficult for European companies to file antidumping cases against low-priced Chinese exports.

Mr. Wen did not offer details on how China might help. Ms. Fu’s remarks represented some of the strongest comments by a Chinese official since then to suggest that Beijing was in no hurry to lend a hand.

In remarks at a conference held at the Foreign Ministry on Friday and then reported by the state media over the weekend, Ms. Fu did not explicitly rule out buying bonds that might be issued as part of a European bailout. She did say that China continued to consider Europe an important economic partner.

But her caution suggested that China was not eager to increase its already sizable investment in the region; the foreign reserves include an estimated $1 trillion in euro-denominated assets, and experts on the Chinese central bank believe that much of it is invested in German government bonds.

Two people close to Chinese policy makers said on Sunday that China was particularly wary of buying any bonds issued in connection with a European bailout as long as there were clear differences within the European Union on the shape of a bailout. They insisted on anonymity because they were not authorized to discuss the subject publicly.

One of the two said China would lend large sums to Europe only if there were clear guarantees by the strongest European countries, particularly Germany, to take direct responsibility for the repayment of that debt.

But Germany has refused to accept that liability. If Germany did give its own repayment guarantee, there would be such heavy demand for the bonds from the Middle East and elsewhere that Chinese money might not even be needed, the person said.

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Inflation Cooling Off in China
HONG KONG — Inflation and industrial activity in China cooled markedly in November, according to data released Friday — an important development that raises the likelihood that the authorities in Beijing will seek to inject more momentum into an economy that has become a key engine of global growth.

Consumer price inflation, which had topped 6 percent earlier in the year, sagged to just 4.2 percent in November, the Chinese statistics office reported. The increase was less than analysts had expected and marked a significant improvement from the 5.5 percent reading recorded the previous month.

At the same time, industrial output data, also released on Friday, showed that activity in November expanded just 12.4 percent from a year earlier. That reading was weaker than the 13.2 percent annual increase recorded in October, and highlighted a development that has become apparent in recent months: economic growth, which was red hot in 2010 and early 2011, has moderated significantly this year.

The positive news is that tighter bank lending, higher interest rates, curbs on property speculation and slowing export growth have also helped to ease inflation, which soared well above Beijing’s comfort level over the summer.

Better-than-expected harvests also have helped bring down food price inflation, which is a particularly sensitive issue in a country where many millions still struggle to make ends meet.

Although it may still be too early for China to claim complete victory over inflation, the sharp drop in inflation “does free up some wiggle room for monetary easing,” Xianfang Ren and Alistair Thornton, economists at IHS Global Insight in Beijing, wrote in a note Friday.

The Chinese authorities’ focus has increasingly shifted from fighting inflation to bolstering growth, especially as Europe, a key destination for Chinese-made goods, is mired in a debt crisis that has badly undermined growth prospects there.

The central bank in South Korea on Friday underscored the effect that a slowdown in the West will have across Asia when it lowered its 2012 growth forecast for South Korea to 3.7 percent, from an earlier projection of 4.6 percent.

And in Japan, revised gross domestic product data showed that the economy grew by less than initially expected during the past quarter: 5.6 percent annual growth from a previous estimate of 6 percent, and 1.4 percent quarterly growth from the previous estimate of 1.5 percent.

The worsening environment has already prompted several rate cuts in the Asia-Pacific region as policy makers race to shore up their economies.

The first significant policy response by Beijing came last week, when the central bank loosened the reins on bank lending by lowering the so-called reserve requirement ratio. Lower reserve requirements effectively free up more lending by banks.

The inflation data on Friday suggested that there will be another cut in the reserve requirement ratio in December, economists at ANZ in Hong Kong said in a note. “We also expect two more such cuts in the first half of 2012,” they said.

The government also “has considerable scope to support domestic demand by boosting income growth and by reducing the tax burden for both companies and individuals,” Jing Ulrich, chairwoman of global markets at JPMorgan Chase, wrote in a note on Friday.

Unlike in 2008 and 2009, when the Beijing introduced a 4 trillion renminbi, or $629 billion, stimulus package, the government’s response this time is likely to be “nuanced,” Ms. Ulrich said.

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Many people wrongly believe that China can improve its foreign relations only by significantly increasing economic aid. But it’s hard to buy affection; such “friendship” does not stand the test of difficult times.

How, then, can China win people’s hearts across the world? According to ancient Chinese philosophers, it must start at home. Humane authority begins by creating a desirable model at home that inspires people abroad.

This means China must shift its priorities away from economic development to establishing a harmonious society free of today’s huge gaps between rich and poor. It needs to replace money worship with traditional morality and weed out political corruption in favor of social justice and fairness.

In other countries, China must display humane authority in order to compete with the United States, which remains the world’s pre-eminent hegemonic power. Military strength underpins hegemony and helps to explain why the United States has so many allies. President Obama has made strategic mistakes in Afghanistan, Iraq and Libya, but his actions also demonstrate that Washington is capable of leading three foreign wars simultaneously. By contrast, China’s army has not been involved in any war since 1984, with Vietnam, and very few of its high-ranking officers, let alone its soldiers, have any battlefield experience.

America enjoys much better relations with the rest of the world than China in terms of both quantity and quality. America has more than 50 formal military allies, while China has none. North Korea and Pakistan are only quasi-allies of China. The former established a formal alliance with China in 1961, but there have been no joint military maneuvers and no arms sales for decades. China and Pakistan have substantial military cooperation, but they have no formal military alliance binding them together.

To shape a friendly international environment for its rise, Beijing needs to develop more high-quality diplomatic and military relationships than Washington. No leading power is able to have friendly relations with every country in the world, thus the core of competition between China and the United States will be to see who has more high-quality friends. And in order to achieve that goal, China has to provide higher-quality moral leadership than the United States.

China must also recognize that it is a rising power and assume the responsibilities that come with that status. For example, when it comes to providing protection for weaker powers, as the United States has done in Europe and the Persian Gulf, China needs to create additional regional security arrangements with surrounding countries according to the model of the Shanghai Cooperation Organization — a regional forum that includes China, Russia and several central Asian countries.

And politically, China should draw on its tradition of meritocracy. Top government officials should be chosen according to their virtue and wisdom, and not simply technical and administrative ability. China should also open up and choose officials from across the world who meet its standards, so as to improve its governance.

The Tang dynasty — which lasted from the 7th century to the 10th and was perhaps China’s most glorious period — employed a great number of foreigners as high-ranking officials. China should do the same today and compete with America to attract talented immigrants.

OVER the next decade, China’s new leaders will be drawn from a generation that experienced the hardships of the Cultural Revolution. They are resolute and will most likely value political principles more than material benefits. These leaders must play a larger role on the world stage and offer more security protection and economic support to less powerful countries.

This will mean competing with the United States politically, economically and technologically. Such competition may cause diplomatic tensions, but there is little danger of military clashes.

That’s because future Chinese-American competition will differ from that between the United States and the Soviet Union during the cold war. Neither China nor America needs proxy wars to protect its strategic interests or to gain access to natural resources and technology.

China’s quest to enhance its world leadership status and America’s effort to maintain its present position is a zero-sum game. It is the battle for people’s hearts and minds that will determine who eventually prevails. And, as China’s ancient philosophers predicted, the country that displays more humane authority will win.

Yan Xuetong, the author of “Ancient Chinese Thought, Modern Chinese Power,” is a professor of political science and dean of the Institute of Modern International Relations at Tsinghua University. This essay was translated by Zhaowen Wu and David Liu from the Chinese.