WASHINGTON — Judging from comments by U.S. Trade Representative Michael Froman on Tuesday, Chinese President Xi Jinping’s visit here this week isn’t going to be all sweetness and light.

Froman leveled blunt criticism of China’s economic policies, calling the country’s current model unsustainable. The comments are bound to add to mounting nervousness that the slowdown in the Chinese economy may be greater than the nation’s government has admitted, jitters that contributed to a triple-digit decline in the Dow Jones Industrial Average on Tuesday. The Dow fell 179 points, or 1.1 percent, to 16,330 while the S&P 500 lost 1.2 percent to 1,942. The Nasdaq dropped 1.5 percent to 4,756, and the S&P 500 Retailing Industry Group index lost 1.2 percent to 1,194.

Froman also gave an update on the 12-nation Trans-Pacific Partnership negotiations, acknowledging that negotiators were in San Francisco Monday and Tuesday to narrow differences on rules of origin for autos in the run-up to what could be another ministerial round in Atlanta next week.

On China, Froman did not mince his words in a key policy speech at the Center for Strategic and International Studies, where he outlined what the U.S. believes is China’s failure to implement strong enough market-based reforms in trade and investment. He said China is at an “inflection point.”

“In many respects, reform and the development of a market-based economy slowed during the last decade,” he said. “Weak intellectual property standards and persistent or even intensified information controls have devalued investment in science and technology. Over-investment in property and heavy industry has created high levels of debt, crippling overcapacity and the market volatility of booms and busts.”

The USTR’s tough assessment came three days before Xi’s state visit here on Friday, and on the same day the Chinese president was touching down in Seattle to meet with tech industry executives.

“What is certain is that China’s current model is not sustainable,” Froman declared. “Looking forward, China needs to accelerate its transition from investment-led to consumer-led growth, from over-investment in heavy industries to 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.

The U.S. and China have long engaged in thorny domestic and geopolitical issues, but Xi’s upcoming visit has been marked by stronger rhetoric and intensifying concerns from the Obama administration, particularly in the area of cyber security, where the president has said he is compiling a list of possible sanctions to levy against China.

The world’s second-largest economy also recently rattled international financial markets when it suddenly devalued its currency, the yuan, as it sought to shore up its lagging economy, leading to calls for tough enforcement against market interventions.

Froman, who is helping lead the U.S. effort to complete negotiations on a Bilateral Investment Treaty with China, bluntly laid out what the U.S. sees as China’s shortfalls on its commitments to market-based reforms.

He called China’s rise “nothing short of remarkable” over the past three decades, noting that its market-based reforms have led to greater openness to trade and investment, as well as rapid growth in productivity. However, Froman also noted that the model that helped China progress during the past three decades must change.

“Increasingly and especially in light of China’s slowing economy and recent market instability, observers are starting to question whether China has both the capacity and the commitment to follow through on these reforms,” Froman said. “In some important areas, there is a troubling gap between China’s official objective and its actions. 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 are seeing in a number of areas.”

Froman said China’s requirement of making the transfer of technology, intellectual property or user data a “de facto condition” of doing business in the country is “not consistent” with its objectives. He also said “screens” that help China’s economic security interests and “overly broad” antimonopoly laws against foreign investors are inconsistent with its goals.

He stressed that the necessary reforms China must make are “no state secret,” pointing to a need for greater openness to services, agricultural and manufactured goods, as well as more open competition through a “meaningful reform” of the state-owned enterprises sector and “fairer treatment” of foreign businesses.

The BIT negotiations are one area where the U.S. can engage on China’s domestic reform efforts, Froman said, noting the two sides have made significant progress in the past 20 months. He also said the BIT talks can provide an 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.”

As for the closely watched TPP talks, which include the U.S., Japan, Australia, Vietnam, New Zealand, Peru, Chile, Malaysia, Brunei, Mexico and Canada and Singapore, Froman said negotiators are close to wrapping up the negotiations.

“Coming out of the Maui ministerial at the end of July and early August, we were able to reach agreement or identify landing zones for a vast number of issues, but there were a handful of issues that required more work,” Froman said in response to a question on the status of the TPP. “We’ve been working since Maui with all of the countries in TPP bilaterally in small groups to find those landing zones. That work continues, including the work on autos that is going on in San Francisco. I think we are making steady progress. We are going to continue to monitor that work so that we can bring this to a close as soon as possible.”

 

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