[FarKalkir]

Tensions push Congress to get even with China

Sen. Christopher Dodd (D-Conn.)
AP file
By David J. Lynch, USA TODAY
After years of inconclusive skirmishing, trade tensions between the United States and China are about to intensify. The escalation comes as both countries' domestic political calendars are complicating prospects for the compromises needed to call off this high-stakes game of financial chicken.

On Capitol Hill, lawmakers from both parties are drafting legislation designed to punish China for trade practices they say violate the Asian giant's international commitments and leave American companies at a profound competitive disadvantage. A bilateral trade deficit that yawns wider with every year is fueling the push for action.

"We're competing not only with a country with low wages but with very high and heavy subsidies and a rigging of their currency. Essentially, you have China with a very clear-cut economic plan in terms of exports and (the U.S.) saying … it will work out or we'll talk. But that hasn't worked," says Rep. Sander Levin, D-Mich., chairman of the House trade subcommittee.

A bipartisan quartet of influential senators on Wednesday is scheduled to unveil a measure to pressure China into accelerating its evolution to a market economy, while Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, readies a separate bill that would target China's currency policy. House Ways and Means Committee action on a competing trade proposal will occur in the next few weeks, according to Levin.

But even as the mood in Congress hardens, some economists are warning that the likely congressional action could backfire. Stephen Roach, Asia chairman for investment bank Morgan Stanley, calls the prospect of a trade war between the world's largest and its fastest-growing economies "the biggest risk to the global economy."

Imposing duties on Chinese imports would result in "a direct hit on the American consumer" as prices of products such as clothing, furniture, computers and appliances rose. If China retaliated by curtailing purchases of U.S. government securities, long-term interest rates would rise and the value of the dollar sink. The effect of this action-reaction cycle on an already fragile economy, as the USA enters the presidential election year of 2008, could be enough to tip it into recession, Roach warns. The Shanghai newspaper Jiefang Ribao agrees: "Once a trade war breaks out, it will be devastating for China and the United States."

The U.S. has been here before. In the 1980s, as surging imports of Japanese autos and electronics seemed to highlight American industrial decline, the U.S. won "voluntary" import limits from Tokyo. Fears that a weak yen gave Japanese exporters an unfair edge led to 1985's landmark "Plaza Accord," which reset global currencies.

But today, the target of U.S. ire isn't a democratic ally ultimately dependent upon the American military for its security. It's a prickly, one-party state with deep memories of humiliation by foreigners and aspirations for recognition as a global power. Where Japan was prepared to absorb some U.S. criticism, China's patience is likely to prove more limited.

Relationship out of balance

Still, there's no question that the Sino-U.S. trade relationship is out of balance. The debate is over why and what to do about it.

Last year, the USA sold $55.2 billion worth of goods to China. Only three other countries — Mexico, Canada and Japan — bought more U.S.-made products than China did.

"Our companies do not want to see a trade war with the Chinese. Our companies want to expand trade relations. It's a very, very good market for the U.S.," says Cal Cohen, president of the Emergency Committee for American Trade, which represents companies such as Cargill, IBM, Boeing and McGraw-Hill. But those impressive exports were dwarfed by imports from China of $287.7 billion, resulting in a $232.5 billion bilateral trade deficit, the USA's largest single-nation shortfall.

Under U.S. pressure, China over the past two years has allowed its currency, the yuan, to rise in value about 8%. Despite that increase — which makes Chinese products more expensive in dollar terms and thus presumably less attractive to buyers — the trade gap this year is running ahead of last year's pace. Through the first four months of 2007, the $76.3 billion deficit was 18.5% greater than during the same period in 2006.

Critics blame the runaway deficit on Chinese policies that keep the yuan artificially depressed and provide exporters with generous subsidies. On the eve of high-level talks in Washington last month, China announced it would begin allowing the yuan to fluctuate more on a daily basis, the latest sign of its gradual move toward allowing the market to determine the currency's value. But lawmakers such as Sen. Charles Schumer, D-N.Y., one of the authors of the forthcoming Senate bill, derided the move as too little, too late.

The Chinese currency remains as much as 40% below its fair market value, says economist Morris Goldstein of the Peterson Institute for International Economics in Washington. Chinese exporters, many partially owned by the government, also enjoy a range of benefits, including financing by state banks.

Treasury Secretary Henry Paulson, however, says the unbalanced Sino-U.S. trade is not a result of Chinese cheating. Real improvement in the trade statistics depends upon ongoing "structural" reforms to reduce China's reliance upon exports and increase consumption by Chinese consumers, he says. The administration opposes legislation designed to crack down on China. But lawmakers hope to assemble a veto-proof majority.

U.S. firms in a bind

In markets from apparel to electronics, American companies that compete with Chinese rivals are struggling to keep pace. In Cary, Ill., northwest of Chicago, Bartlett Manufacturing has seen sales of its printed circuit boards sag from $20 million in 1999 to about $9 million today, according to Douglas Bartlett, the company chairman.

Bartlett, 50, says longtime customers tell him they can buy Chinese circuit boards for a fraction of his price, often for no more than the cost of materials. Example: Bartlett sells a circuit board used in the turn signal on a Japanese car for 39 cents each. He's about to lose an order to a Chinese maker that sells the same product for 20 cents.

"That's not (because of) labor prices alone. It's currency and export subsidies. … It's not free trade now; it's unfair trade," Bartlett says.

Manufacturers have been airing similar complaints for years. But they've been getting a more sympathetic hearing since November, when Democrats took control of Congress.

Chinese officials felt the new mood last month during meetings timed to coincide with the Cabinet-level Strategic Economic Dialogue held in Washington. The unusual Capitol Hill sessions, which brought together Chinese Vice Premier Wu Yi and key lawmakers, was aimed at promoting mutual understanding. But at least in Levin's case, the meeting appeared to do just the opposite.

In an interview, Levin said Wu described the U.S. and Chinese economies as "complementary," saying China shipped shoes and clothing to the USA while American companies sent high-tech products to China.

But citing Census Bureau data showing the U.S. running a deficit even in trade of advanced technology goods, Levin disagreed.

"That's just not true," said Levin. "What she said is just wrong."

Indeed, through April, the USA imported $20.5 billion more in high-tech products from China than it shipped there.

A complex relationship

But reflecting the complexity of the Sino-U.S. trade relationship, of the 10 categories of high-tech products tracked by the Census Bureau, the USA enjoys a trade surplus with China in eight. The two categories that account for the overall high-tech deficit are mostly consumer electronics, largely laptop computers, DVD players and CD players. And more than 90% of those products are produced not by domestic Chinese companies but in the factories of multinational corporations in China, according to Nicholas Lardy, a Peterson Institute specialist on the Chinese economy.

The prominent role of multinationals in exports from China is one indication of the difficulty of fashioning effective trade sanctions. Some products that appear in trade accounts as "Chinese" emerge from factories owned by Taiwanese, Japanese or even U.S. corporations.

Another question is how China will react when the U.S. acts. Like the U.S., China is in the midst of an intensely political season. This fall, a critical Communist Party Congress, which occurs only every five years and determines the individual career prospects of thousands of officials, is scheduled for Beijing. Party officials at all levels typically are preoccupied with internal jockeying for influence for months before such conclaves. This year, such concerns are especially intense because the eventual successor to Party General Secretary Hu Jintao is expected to be determined, potentially reshuffling the landscape of Chinese politics.

"Domestic issues trump international issues in every political system in the world, and China's no exception," says Susan Shirk, author of China: Fragile Superpower.

Shirk, a former National Security Council aide during the Clinton administration, says the Chinese government is divided between those who want to continue integrating China into the global economy and economic nationalists who favor cultivating home-grown commercial stars while curbing international ties. In the run-up to the party congress, officials will be enormously reluctant to offer the sort of concessions to the U.S. that could defuse trade tensions.

"It's not a time for bold initiatives," she says.

Still, if there's to be a trade war, it will be a slow-motion conflict. The measures now under consideration, designed to comply with World Trade Organization rules, would expand the remedies U.S. companies affected by Chinese competition could seek, says Bill Reinsch, president of the National Foreign Trade Council, a business lobbying group. But even if Congress acts, duties wouldn't automatically be applied. Individual U.S. industries or companies would first have to petition the Commerce Department, triggering an administrative process that can take over a year before duties are imposed.

In only about half the cases does the department find that unfair foreign competition injured the complaining American industry, a necessary judgment for duties to be approved, says Reinsch, an ex-Commerce official. "At the end of the day, the number of Chinese producers affected by what we do is a lot smaller than you'd think."

Nonetheless, if Congress passes, and the president signs, legislation opening the door to duties on Chinese imports, China will respond, Shirk says. Beijing could impose tariffs on U.S. products, restrict additional foreign investment opportunities, or purchase fewer dollars and more euros or yen, says Morgan Stanley's Roach.

On Capitol Hill, meanwhile, China's critics are out of patience. Levin makes it clear he doesn't take seriously the notion that domestic Chinese politics might limit Beijing's freedom to maneuver and he waves away "trade war" talk.

"I hate the term 'trade war' because it's always used when you try to get a fair break. … People don't like it when you push back," he says. "Sometimes pressure works."

Man, why's Congress gotta go off thinking they're economists? Especially when this is my future career we're talking about.

Congress is stupid. Throw rocks at it.

[Pope Larry]

Looks like the economy will be destroyed without the help of Hilary.