Former U.S. Secretary of State John Kerry and former Treasury Secretary Jack Lew speak with CGTN's Wang Guan on the eve of the 2014 Strategic and Economic Dialogue. The talks came at a delicate period in the China-U.S. relationship.

Complete transcript of exclusive interview with former U.S. Secretary of State John Kerry and former Secretary of the Treasure Jack Lew.

WANG GUAN, CGTN

So why don't I start with you, Secretary Kerry. How would you characterize the state of US-China relationship today? Does the U.S. see China as a true partner or an inevitable rival?

JOHN KERRY, FORMER U.S. SECRETARY OF STATE

Well, we definitely don't view China as an inevitable rival, we view China with hopes and possibilities of increasing partnership. It's a very important relationship. Secretary Lew and I are looking forward to this strategic dialogue because it's important to both of our countries. And we want China to understand that this doesn't have to be a rivalry. There are sometimes things in which we are in competition, but it's much more important for us to find the ways to cooperate because the world needs leadership. China is a rising power, an extraordinary economy, a nation with huge responsibilities as a permanent five member of the United Nations Security Council, and we work together on a lot of things; we're working on Iran, on Syria, and other things. So we want to grow the partnership. We don't see an inevitability of rivalry.

WANG GUAN, CGTN

The two leaders this time last year said that they want to build a new model of major country relationship, but some critics say, you know, as intertwined as the two economies might be, there are political realities at home…they have diverging/sometimes diverging political interests. So how can this new model be achieved? What does this new model mean to you?

JOHN KERRY, FORMER U.S. SECRETARY OF STATE

Well the new model is still being defined. It's a good concept and we want to have a great power relationship with China, but it's important for China to recognize that there are global norms, standards of business, standards of international behavior that countries live up to, and it's very, very important for us to eliminate the areas of friction. Whether it's in cyberspace or on opening up markets, there are area where we can do a better job of creating a fair playing field and opening up opportunity for both of our countries. And that's really what this dialogue is about and that's particularly where Secretary Lew's participation is so important because of the economic component.

WANG GUAN, CGTN

Right. And talking about economics, Secretary Lew I want to start with the US economy. The latest figure showed that the US economy shrank by 2.9% in the first quarter. First of all, your interpretation on this figure and your assessment on the state of the US economic recovery.

JACK LEW, FORMER TREASURY SECRETARY

I remain quite optimistic about the state of the US economy and the trajectory we're on. We had a very cold winter this year…it drove down activity. We also had inventories built up at the end of last year and they naturally drew down at the beginning of this year, and there were some things going on that were actually quite anomalous at the beginning of the year. If you look at the data from March/April/May it all shows continuing growth consistent with what we were seeing at the end of last year. And, look, I think that's important for the United States – I think it's important for the world economy. China and the United States are the world's two largest economies. We have special responsibilities, both in terms of our own economies and the global economy. And that's why the discussions that we're going to be having at the S&ED in a week are so important because we need to be able to work well together and to make sure that there is a US-China relationship that's good for the global economy.

WANG GUAN, CGTN

Right. Talking about China's economy-it's also slowing down and reforms are underway, while the US is trying to sustain its economy. So given these new realities, what do you think that these new realities will mean for bilateral economic relationship?

JACK LEW, FORMER TREASURY SECRETARY

Look, I think China is undertaking an ambitious set of reforms through the leadership of President Xi and the third party plenum. It is a set of policies which, I think, are very important for China's future economic growth, and we have been very much encouraging moving ahead with that. I know there's been a lot of focus on the short-term economy. I have consistently been on the more optimistic side that China has tools to deal with the short term. I think the real challenge is making sure that China is on a path for the medium and long term to keep growing. It's important for China, it's important for the US economy, and the global economy.

WANG GUAN, CGTN

And talking about the S&ED. What can we expect? What specific problems will this round of the dialogue solve, first of all, on the economic track?

JACK LEW, FORMER TREASURY SECRETARY

Well look, on the economic track we have had successful discussions over the last six years where we make progress step-by-step. The issues that we're dealing with are familiar and there are issues we need to make more progress on. From our perspective, having a level playing field where US businesses can compete with Chinese businesses– both in the US and China – is important. Our markets are very open; we welcome investment. We look forward to having opportunities for US businesses to participate and contribute to China's economy. The exchange rate – it's an issue which has been a very significant one in our discussions. Since 2010 there has been progress but over the last year we have seen the exchange rate go down again. The first step would be transparency – if it was clear when the government was intervening and why – that would help quite a lot. China needs a market determined exchanged rate, it's something the government has committed to in its own policy statements and it is an important part of our conversations. Last year we made progress in the S&ED on the bilateral trade agreement where China agreed to a negative list. We need to see more progress populating that list and starting to see how it can become the basis for further discussions.

WANG GUAN, CGTN

Secretary Kerry, what can we expect on the strategic track?

JOHN KERRY, FORMER U.S. SECRETARY OF STATE

Well there are many things on the strategic track. Obviously of enormous concern is the situation in North Korea; the threatening nature of the regime in North Korea. We need to work very closely with China. We are really two key partners in the efforts to try to denuclearize the Korean Peninsula. We also need to focus on the relationship between Japan and China, South Korea and China, and Japan and South Korea, and that's a very important triangle that we really need to be focused on. We need to focus on the South China Sea. There is a great tension, as you know, regarding the question of boundaries and the question of sovereignty over certain portions of the South China Sea in the Thomas Shoals and the Scarborough Shoals, the fisheries, and all of these issues – we need to talk about them. We're going to focus on climate change very, very significantly. Secretary Lew and I – President Obama particularly – believe that climate change offers us enormous opportunities to make choices about energy and energy policy which will open up a vast new market for all of our countries and help solve the problem of climate change. So we're particularly interested in working on the 2015 targets that have to be announced by both of our countries, and we want to try to work on those together. And then, of course, we have number of issues globally where China's leadership is important – Iran and Iran's nuclear program, Syria…we could love to try to find a way to resolve the killing and to end the crisis of Syria, the Mideast peace process –in all of these China is a very important player, a very important potential partner with us and we look forward to having a good discussion.

WANG GUAN, CGTN

One issue of hypersensitivity back in China was America's policy of pivot to Asia. Since the announcement of the policy we've seen America strengthening alliances and forging new partnerships, and if you look on the map – actually I brought one here today – these alliances and partnerships encircled none other than China, so many back in China believe that the Asia pivot is largely aimed at containing China.

JOHN KERRY, FORMER U.S. SECRETARY OF STATE

Well let me see your map a minute. Let me show you something

WANG GUAN, CGTN

Or at least hedging against China.

JOHN KERRY, FORMER U.S. SECRETARY OF STATE

This is not a circle. All of these are areas where China has very strong relationships and the United States is not trying to do things. We're involved with countries – Philippines, Vietnam has been an emerging relationship since our war – we are involved with countries with whom we have a very longstanding security relationship. The fact is that we do not have a policy of containment of China or of encirclement of China. What we're trying to do is grow the relationship of a Pacific nation. We are a Pacific nation. For hundreds of years the United States has been engaged in the entire region going back into the 1800 when we first became a sea power. So America is only pursuing what we have pursued and mostly we're trying to grow the marketplace for all of us with a set of rules that everybody can play by. That why the Trans-Pacific Partnership, which Secretary Lew is so involved in designing, is an opportunity for all of the countries, ultimately even China. It will grow; it will become a very significant economic trading entity and we would welcome China and others to meet the standards and live up to these sort of higher standards by which we all engage in business and everybody will benefit form that. But China really needs to move away from this theory…this conspiracy theory that somehow the United States is focused exclusively on China and on containing China.

WANG GUAN, CGTN

The (containment) theory's false?

JOHN KERRY, FORMER U.S. SECRETARY OF STATE

The theory is 100% false. We are anxious to build a strong working partnership with China as a leading economic power and a leading strategic power with a major role at the United Nations and in terms of world affairs.

WANG GUAN, CGTN

What does the Asia Pivot mean from an economic perspective, Secretary Lew?

JACK LEW, FORMER TREASURY SECRETARY

From an economic perspective, as Secretary Kerry was saying, the Trans-Pacific Partnership was designed to raise standards, to have a high quality agreement so that we could increase the growth and the economic activity in the whole region. That's good for the United States, it's good for China, and it's good for the global economy. We started TPP as a way to say anyone who's willing to live with high standards is welcome to be part of it. We want to drive the world to being open without barriers and to have fair, level playing field, which is good for all of our economies. It was misunderstood early on in China. As I've had conversations over the last year and a half, I think it's better understood now. The questions are very different now than they were even 18 months ago. It is not something that was designed to keep China out or about China, it was designed to raise standards and we hope China can raise its standards in so many of the ways we're talking about.Great powers have responsibilities. As an economic great power, one of the two largest economies in the world, China in particular has a lot of responsibility, as do we.

WANG GUAN, CGTN

So the US would welcome China's participation?

JACK LEW, FORMER TREASURY SECRETARY

We have designed TPP as being opens for countries that have high standards that want to join. I think the challenge for China would be to meet the high standards and we think that's a challenge that's worthy of all the countries in the region of seeking.

WANG GUAN, CGTN

Secretary Kerry, another issue of hypersensitivity back in China is China-Japan territorial disputes over Diaoyu Island. Last month, when President Obama was in Asia, he said the Diaoyu Island falls under U.S.-Japan security treaty. What does that mean?  Does that mean the U.S. will come to Japan's defense should there be a war between China and Japan?

JOHN KERRY, FORMER U.S. SECRETARY OF STATE

Well I hope there's never going to be a war between China and Japan. I can't think of anything more wasteful or unnecessary. This is something that can be resolved. You are talking about some rocks of the ocean that aren't exactly the largest area of land, or criticality. So people ought to be able to find a reasonable way forward but we have always recognized we do not make a determination as to the sovereignty over the island. The United States do not make that determination. What we have said is that true to recent history certainly, Japan has administered the authority over those islands. Administered the authority. We are saying that any aggressive action by any country, not just China, but by any country, would have to fall under our security relationship with Japan. And we have responsibilities under that security relationship. But our first goal is to try to see Japan and China work to come back to where it was before when it was not such a contentious issue, and work through a peaceful resolution.

WANG GUAN, CGTN

Secretary Kerry, but lots of people back in China feel and perceive that America is not being fair perhaps, because Washington would selectively look at facts on the ground to support its treaty ally Japan. For example, they said, it was really the Japanese government's nationalization of the island in September 2012 that started to escalated tensions, which was ignored by Washington. 

JOHN KERRY, FORMER U.S. SECRETARY OF STATE

No it hasn't been ignored. We acknowledged when the mayor of Tokyo moved independently in order to buy the islands and have am impact on it, this had an impact on people's perceptions. We don't deny that. What we are asserting ,however, is the way to solve it is not by having ships in near collision and flights that are provocative. The way to solve it is through the international legal system, through the Law of the Sea and different courts of arbitration. And frankly through dialogue together. You will have to be able to resolve this kind of issues. One of the defining attributes of a great power relationship, of a great power status, is that you act responsibly and try to work through these things to set an example to other nations. You can't have force. China appropriately opposed, expressed its concerns about Russia moving into Crimea. Why? Because that was a unilateral action, use of force, in order to assert something. By the same standards, China and Japan both need to refrain from similar kinds of activities to assert jurisdiction over these islands. They need to be resolved in a peaceful way.

WANG GUAN, CGTN

Talking about Japan. People noticed its move to the right. Because since taking office, Prime Minister Abe has visited the Yasukuni shrine. He launched school textbook reforms to downplay World War II history, and he's launched what's considered a revisionist investigation over comfort women. Is the U.S. concerned by such moves?

JOHN KERRY, FORMER U.S. SECRETARY OF STATE

Yes and we have expressed that concern. We were very specific about the concerns of the visit to the shrine. Our ambassador spoke out in Japan and we have expressed our concern. We think it's very very important not to have revisionism of history. It's important for countries to deal with you. We've encouraged the Japanese to deal with this issue with Korea with respect to the comfort women, and we would continue to encourage them to do so. But we don't want any country trying to use these issues to drive wedges. It's important that people engage in a quiet and appropriate kind of dialogue to resolve these problems in ways that don't embarrass people, or try to win public victories. That's not what this is about. This is about building relationships, and building a future in which the people of all of the countries in that region can feel that they are secure and they are living with stability and with the promises of future economic growth and development so that they do better. 

WANG GUAN, CGTN

Taking about regional economic development, obviously China-U.S. Investment relationship is very important. Secretary Lew, you mentioned the Bilateral Investment treaty, the negotiation over which re-started last year, when can we expect it to conclude? What are the challenges?

JACK LEW, FORMER TREASURY SECRETARY

These are always challenging agreements and I think it was an important first move that China last year said it would move to a negative list. We have not yet seen that list populated. We've not seen exactly how Shanghai Free Trade Zone develops. I think there is work to be done there and we look forward to engaging with our Chinese counterparts. I don't think bilateral investment treaties get negotiated in days and weeks so it's not something that's likely to be completed at this moment. But we continue to make progress and continue to open markets. You know we pride ourselves that the United States, our markets, are among the most open in the world. From the beginning of our country, encouraging foreign direct investment has been one of the ways we've grown. I actually think it would be good for China to make progress in this area and good for the world economy. Certainly there are American companies that would be happy to do business in China if the level playing field can be provided. There are other issues of concern that's outside the scope of the bilateral investment treaty. You talk to companies seeking to invest in China, the questions about intellectual property come up almost every time. So it's part of a package of issues where to be one of the leading economies in the world, to be one of the leading nations in the world, you have to meet a certain set of standards. And we look forward to working with China as it meets those standards and we can strengthen our economic relationship. One of the things I will say is that in times where there are other issue that are challenging, we continue to make progress on economics issues. It's important for both our countries and for the world economy. 

WANG GUAN, CGTN

Talking about challenging issues, cyber security is definitely one. When the U.S. Indicted five Chinese military officers last month, it said industrial espionage is something the U.S. does not do. But according to revelations by Edward Snowden, the NSA has hacked into private firms as well as trade officials, including the anti-trust commissioner of the EU, Mr.Joaquin Almunia, to allegedly advance America's economic interests. Because Mr. Almunia had previously fined Microsoft and Intel and threaten to fine Google.  So how are these activities, Secretary Kerry, different from what the U.S. accused China of doing?  Is there a double standard here?

JOHN KERRY, FORMER U.S. SECRETARY OF STATE

None. None whatsoever. And I can absolutely guarantee you that the United States does not engage in any kind of information gathering through any government, security service, in order to transfer to any business, or to advance American business. It just doesn't happen. Period.

WANG GUAN, CGTN

But according to a (U.S.) congressional report, as early as 1996, this report is called Aspin-Brown report on U.S. Intelligence capability. It said "U.S. Government spies on foreign firms to identify situations where U.S. commercial firms are at a competitive disadvantage". And thanks to such efforts, " U.S. Firms obtained billions in foreign contracts they would otherwise have lost." Isn't this industrial espionage?

JOHN KERRY, FORMER U.S. SECRETARY OF STATE

I have no idea where that information comes from or how it's compiled. I can tell you there is no active, ordered, instructed policy by which any government agency is gathering information for economic purposes or advantage that it then transfers to any company in America. I don't know if on some instance, somebody gathered something or did it on their own or whatever, I can't tell you that. But I can tell you it is not ordered by, sanctioned by, or proved by the government and by this administration.

WANG GUAN, CGTN

Finally on Iraq – Secretary Kerry you just came back from Iraq. Now looking back at the turmoil – this is something you have been very engaged in – do you think the previous administration's intervention in Iraq in 2003 was, as some call, a grave mistake? And what will the U.S. do next?

JOHN KERRY, FORMER U.S. SECRETARY OF STATE

Well I'm on record historically, not only in saying that it was a grave mistake, but in running against the president who ordered it and offering an alternative, so I'm hardly capable of, you know, ducking that squarely. Yes, I think it was a grave mistake and I think we are still working through many of the problems associated with it even today. There is a huge residual hangover – a cloud that hangs over the region as a consequence of that decision. Now, We are working very hard, President Obama's decision was to make certain that we tried to change that, and that's why he moved to withdraw the combat troops. And now we're working very, very hard to empower the Iraqis themselves. They have to make this decision. Iraqis have to decide who their government is and it needs to be a representative unity government that brings people together and resolves through its reforms, in terms of its relationship to the Kurds, its relationship to the Sunni – everybody… and the Shia…all have to be feeling as if their needs are being met through the governmental process and structures that are established. That's what we hope will emerge through the Iraqis themselves and their decisions in the next few days.

WANG GUAN, CGTN

Thank you so much Secretary Lew and Secretary Kerry.

JOHN KERRY, FORMER U.S. SECRETARY OF STATE

Thank you, good to be with you.

JACK LEW, FORMER TREASURY SECRETARY

Good to be with you.