Trade Scene: Chinese fireworks on horizon?

WASHINGTON - The Census Bureau is likely to deliver soon a stunning statistic: in 2002 the U.S. trade deficit with China hit the $100 billion mark.

Never before has the United States incurred such a lopsided trade imbalance with another country. It represents more than one-fifth of the global U.S. merchandise trade deficit.

The United States takes about 40 percent of China's worldwide exports; China buys a mere 3 percent of all U.S. merchandise exports. Within a year or so, if recent trends continue, China will become the United States' second-biggest foreign goods supplier , surpassing Mexico and exceeded only by Canada.

Making last year's massive U,.S. deficit with China the more remarkable, it occurred just as China began opening its markets through across-the-board tariff cuts and easing non-tariff barriers - commitments it undertook when it entered the World Trade Organization in December 2001.

True, U.S. goods exports to China in 2002 were up roughly 15 percent from a year earlier, buoyed by substantial gains in aircraft, integrated circuits and other electrical items, fertilizers, chemicals and wood and paper products, Still, U.S. imports from China grew by nearly 20 percent and from a much bigger base.

To make a dent in the bilateral deficit, U.S. exports to China must rise, percentage-wise, at least six times as fast as U.S. imports from China.

The trade imbalance may even pose a national security threat, say some analysts, since computers and other high-tech equipment has replaced textiles, footwear and toys as the leading imports from China.

The United States now buys twice as much advanced technology products as it sells to China, notes the U.S.-China Security Review Commission, a congressional advisory group.

If this trend persists, it warns, the United States could become dangerously dependent on China for some of those items, undermining its defense industrial base.

Still, the outlook is for yet bigger trade imbalances thanks in part to ever-increasing foreign direct investment in China. Last year, those investment inflows reached a record $50 billion, much of it for new manufacturing plants that sell not only to China but for export markets . For many U.S. producers, it looks like a double whammy: rising imports from China, tougher competition in China and third-country markets.

Says one business executive: "When you get a group talking about trade, the talk invariably turns to China. People are scared silly."

One big hope for a more balanced Sino-American relationship is the market-opening reforms China is carrying out as a WTO member. China, says the U.S. Trade Representative's office, has made "significant progress" in implementing its commitments but "much is left to do."

Indeed, what is "left to do" poses a daunting challenge. It includes, says the USTR, fairer allocations of tariff rate quotas for such commodities as wheat, corn, cotton and automotive products; removing subsidies for electronic and bio-medical products; less "trade distortive" import licensing procedures; science-based sanitary and phytosanitary standards; non-discriminatory tax treatment, and much stronger enforcement of patent, copyright and trademark rights.

In 2002 China either delayed some important market-opening measures or only partly implemented them or even created some new procedural obstacles.

Some of this was laid to "start-up difficulties." But U.S. patience may soon start wearing thin. This year, says Robert Kapp, the U.S.-China Business Council president, the United States and other countries will "increasingly raise questions" about China's WTO "implementation process."

Sen. Max Baucus, the Senate Finance Committee's ranking Democrat, hints that Congress will take a much closer look this year at China's performance. If China fails to make good on its market-opening pledges, the "next step," he says, is to take China to a WTO dispute settlement panel.

Meanwhile, there is one big step that China could take that might almost overnight alleviate the egregious U.S. trade imbalance -let its yuan currency float on world exchange markets.

Almost surely, it would rise in value - estimates range from 15 to 40 percent - making U.S. exports to China more price competitive and imports from China less so. Ernest Preeg, a Manufacturers Alliance senior analyst, estimates that this could pare the U.S. trade deficit by tens of billions of dollars a year.

U.S. business groups are increasingly calling on the Bush administration to press China to stop pegging the yuan at an artificially low rate. "We are extremely concerned about the renminbi's undervaluation...it's a deliberate manipulation of the currency," says Frank Vargo, the National Association of Manufacturers vice president for international affairs.

But top Chinese officials, including Premier Zhu Rongji, indicate that they are not planning on a currency float, at least any time soon. A "stable" currency, insists Zhu, has helped increase China's "national strength."

Meanwhile, the U.S. Treasury Department, in its latest report on international exchange rates, finds "no evidence" of Chinese currency manipulation. "Over time," predicts one senior Treasury official, China "will move toward more flexibility."

But if meanwhile the U,.S, trade deficit with China keeps mounting and China keeps lagging on promised trade reforms, it "could lead to a major blowup" in Sino-American trade relations, Vargo and others caution.

In a word, there may eventually be some big fireworks in Washington. Not Chinese, but anti-Chinese.

Richard Lawrence, a long-time trade reporter for The Journal of Commerce, is based in Washington.

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