February’s visit to the U.S. by China’s likely next leader, Xi Jinping, provides policymakers and business leaders in both countries with a fresh opportunity to take stock of the condition of commercial ties between the U.S. and China, the world’s two largest economies.
With the next presidential election on the horizon, many American politicians on both sides of the aisle are eager to attribute China’s bulging trade surpluses with the U.S. — and the country’s high unemployment rate — to China’s undervalued currency, unfair government subsidies and other predatory trade practices.
Last October, the U.S. Senate approved, 63-35, the Currency Exchange Rate Oversight Reform Act of 2011, aimed at requiring China to correct its misaligned currency. Although the House of Representatives hasn’t come close to voting on a similar proposal, bipartisan support for such legislation remains fairly strong. In January, President Obama announced in his State of the Union speech a Trade Enforcement Unit that will “be charged with investigating unfair trading practices in countries like China.” The announcement drew strong applause from Democrats and Republicans.
Even presidential contender Mitt Romney, a staunch proponent of free trade, couldn’t resist the political temptation to sound a harsher tone against China shortly after Xi visited Washington. Romney warned boldly in a newspaper column, “Unless China changes its ways, on Day 1 of my presidency, I will designate it a currency manipulator and take appropriate counteraction. A trade war with China is the last thing I want, but I cannot tolerate our current trade surrender.”
For all that, most professional China-watchers dismiss this kind of talk as an unpleasant byproduct of a presidential election season, not the harbinger of any sea change in the bilateral relationship. The U.S. and China are well aware of their mutual interdependence, they say, and have been strengthening their ties in a range of low-key forums that, while they barely attract public attention, quietly strengthen bridges between the two countries’ business communities.
Nicholas Lardy, senior fellow at the Peterson Institute of International Economics, for example, said the “underlying climate” of the U.S.-China relationship is “pretty good, although some trading issues are looming larger” than in the recent past.
The “misalignment” of China’s yuan is no longer top of mind among many U.S. companies, however. Rob Mulligan, senior vice president at the U.S. Council for International Business, said for most U.S. companies doing business with China, other issues have emerged as the top priority, not just recently but “for quite a while.” Lardy said although China’s currency is “probably less undervalued than any time in the last five or six years,” the yuan is still “somewhat undervalued.”
Between 2005 and 2011, the yuan appreciated by about 25 percent versus the dollar, even as China’s bilateral trade deficit grew in every year except 2009.
According to the US-China Business Council, the issue of China’s currency has been overstated. “China’s exchange rate is probably not the significant factor in the U.S. trade deficit that some make it out to be,” the council wrote in a recent report.
That’s because of fundamental changes in the global supply chains of companies that trade with China. From 2000 to 2010, the report noted, as manufacturers increasingly outsourced factory work abroad, China’s share of the U.S. trade deficit rose from 19 percent to 43 percent. Meanwhile, the share of the U.S. trade deficit contributed from the rest of Asia declined from 32 percent in 2000 to 13 percent in 2010. “To suggest, as some have, that if an item were not imported from China, it would be made in the United States, is misleading at best,” the council concluded.
A survey last year by the US-China Business Council found the yuan-dollar exchange rate does not rank among U.S. business executives as a “top issue” that is “harming their sales.” Mulligan added most U.S. companies in China believe it would be better to deal with any possible currency manipulation in a multilateral forum such as the World Trade Organization, rather than for the U.S. to impose unilateral sanctions on China. The US-China Business Council agrees, even as it argues in favor of reforming China’s economy and trade practices.
What kinds of issues get U.S companies more upset than the valuation of the Chinese currency these days? “There is a lot of concern focused on (Chinese government) subsidies that favor certain industries, particularly in the export sector,” Lardy said. “And there is more general concern that China’s industrial policy is becoming more robust and is disadvantaging American firms.”
U.S. policymakers increasingly are concerned about what actions the U.S. could take to counter Chinese subsidies and other kinds of anti-competitive practices.
Mulligan said U.S. trade negotiators have forcefully objected to “indigenous innovation policies” that favor China’s state-owned and state-favored enterprises, and create standards that tend to reduce competition. Although China’s central government “has backed off somewhat” from such measures as a result of that pressure, some leaders of provincial Chinese governments have not been so responsive to complaints. Another long-standing area of concern is China’s lax enforcement of intellectual property right law.
For its part, the United States Council for International Business has been working through the Business and Industry Committee of the multilateral 34-nation Organization for Economic Cooperation and Development to establish “competitive neutrality” in China — that is, rules and regulations that will level the playing field between foreign-owned, private companies and state-owned Chinese firms.
The USCIB and other business groups have tried to promote a bilateral investment treaty that would give equal, reciprocal protection to foreign investments in China, and provide a mechanism for resolving disputes between investors and host governments. Most U.S. free trade agreements have such provisions, but the U.S. and China haven’t signed a free trade agreement, or another such agreement that provides legal guarantees for U.S. investors in China.
Given the shortage of details, it’s difficult to say whether the Obama administration’s tough new task force will play an important role. Shortly before Xi’s visit, however, the US-China Business Council called on both governments to continue to use WTO cases to settle trade disputes, while ensuring that anti-dumping and countervailing duty decisions are “fact-based, shielded from political pressures, and fairly adjudicated based on international norms,” the council said. Anti-dumping and countervailing duty actions “should not be used for retaliatory purposes,” they wrote, no matter how tempting.
However, it isn’t always easy to draw a line between politically motivated trade remedies and those that seem to make economic sense. Take the punitive import tariffs the Obama administration imposed on low-end Chinese tires in 2009 in an effort to relieve “market disruption” caused by a flood of such tires from China. U.S. tariffs on Chinese tires were increased to a rate of 35 percent for the first year, 30 percent in the second year and 25 percent in 2013. These punitively high tariffs were permitted by Section 421 of the Trade Act of 1974, a statute China had agreed to comply with when it joined the WTO in 2001.
Such higher tariffs were supposed to make low-end imported tires so expensive that U.S. tire makers would bring production jobs back to the U.S. What really happened was something quite different. Just as opponents of the punitive tariffs had predicted, U.S. imports of Chinese tires have dropped significantly since last year, but U.S. imports of tires from other countries have increased even more, “suggesting that suppliers are shifting production or sourcing to other countries rather than back to the United States,” according to a recent report by the US-China Business Council.
Even worse, during the first half of 2011, when the punitive tariffs were at their highest, total U.S. imports of tires affected by the Section 421 tariff rose 30 percent in volume and 65 percent in value, compared with the levels in 2009, before the tariffs were imposed. China’s share of those imports dropped from 39 percent to 20 percent, but U.S. tire manufacturing jobs declined 10 percent during that period, according to the U.S. Bureau of Labor Statistics.
In short, the punitive tariffs hurt China, but they didn’t help U.S. manufacturers.
Obama’s critics, even among economists who often support the Democratic Party, argue his administration is doing little to prevent the U.S.-China trade deficit from ballooning in coming years.
“It’s hard to argue that the Obama administration has taken any serious steps to make trade flows move from a minus to a plus in generating growth and employment in coming years,” said Robert E. Scott, director of trade and manufacturing policy research at the Economic Planning Institute in Washington. “While exports to China and the world have been growing rapidly, the volume of U.S. imports increased much more rapidly.”
Since President Obama announced his goal of doubling U.S. exports two years ago, U.S. exports to China have been growing at an average pace of 22.3 percent, but that number has been “more than offset by the growth of imports from China,” Scott said.
So long as those trends continue, he said, the rhetoric against China’s “unfair” trade practices will continue to attract support in both U.S. political parties. But the rhetoric is unlikely to lead to a trade war between two trading partners that are so thoroughly tied together.
Contact Alan M. Field at firstname.lastname@example.org.