Nascent friction in US-China trade

Nascent friction in US-China trade

Tom Hopson, president of Five Rivers Electronics Innovations, a television manufacturer in Greenville, Tenn., says his company has cut production and laid off 1,000 workers. He blames imports from China, which are said to be enough to supply half of U.S. demand this year.

Five Rivers and two labor unions are asking the Commerce Department to declare China guilty of dumping television sets on the U.S. market at below cost, and to impose countervailing duties of 84 percent on Chinese televisions sold in the U.S.

The antidumping complaint is one of several dozen that U.S. companies have filed against China. As the U.S. and China have gone out of their way to stress their positive relationship, which includes Chinese acquiescence in the war on Iraq, trade complaints have tended to get swept under the carpet. U.S. officials have been generally reluctant to criticize China's trade practices as the nation comes under the World Trade Organization.

The U.S. Trade Representative reported in an overview of President Bush's 2003 trade policy agenda that China, which joined the WTO in December 2001, had made "significant progress" in implementing its WTO obligations during its first year of membership, though concerns remain. Trade officials have turned their focus to areas including completing bilateral free trade agreements with nations such as Chile and Singapore, and building momentum for the Free Trade Agreement of the Americas and the current Doha Round of WTO negotiations.

Yet criticism of China from U.S. companies that compete with Chinese imports continues.

To some extent, that can be expected due to China's fast emergence as a major U.S. trading partner.

China's trade deficit with the U.S., the world's largest consumer economy, passed $100 billion last year, the largest bilateral trade deficit in history.

During the last 20 years, U.S imports from China grew at an average annual rate of 20 percent a year, while U.S. exports to China grew at an average annual rate of 12 percent. In 2002, U.S. merchandise imports from China were $125 billion, but exports to China were only $22 billion.

China's accession to the WTO in 2001 signaled its intent to more toward freer markets. But the Chinese government's control of the economy, its low labor costs notwithstanding, has fueled criticism that the nation's manufacturers may be selling to overseas buyers at below production costs.

The U.S. has made China the target of more dumping and countervailing complaints than any other country. The recent report from the U.S. Inter-national Trade Commission listed 50 current antidumping or countervailing-duty orders against China. The country with the second-highest total was Japan, with 30.

U.S. antidumping and countervailing-duty orders against China cover products as diverse as seamless pipe, cotton shop towels, paper clips and crawfish tails, the production of which is a sizable industry in south Louisiana.

U.S. critics of Chinese trade policies say that because China has one foot in the free market and the other in Communism, it's difficult to tell what China's manufacturing costs are.

The U.S. considers China a government-controlled economy, where the cost of goods used in production doesn't reflect their market costs. To determine antidumping charges, the U.S. uses the cost comparison of a third, non-subsidized economy, such as India, to determine whether the dumping charges are justified.

That type of analysis "can have significant distorting effects as to what qualifies as dumping, because you're not looking at the actual cost of manufacturing," said Ronald W. Gerdes, an international trade specialist at the law firm of Sandler, Travis & Rosenberg, which is involved in the Five Rivers television case.

Complaints of Chinese dumping are fueled by the large and growing volume of U.S. imports from China, especially low-value, commodity-type goods that have little to distinguish themselves except price. The emphasis on low-value exports is typical for developing economies, which usually make the transition to higher-value products.

Much of China's lower manufacturing cost is a comparative advantage related to the country's vast work force and its relatively early stage of economic development. Wages in state-supported factories are as low as 35 cents an hour.

U.S. manufacturers say their Chinese counterparts also benefit from China's insistence on keeping its currency artificially low, and that this adds to the difficulty in determining whether China is selling at below cost. Pat Mears, a trade analyst at the National Association of Manufacturers, alleges that China keeps it currency undervalued against the dollar by 15 to 40 percent.

Jay Bender, president of Falcon Plastics Inc., a Brookings, S.D., manufacturer of plastic-molded components, assemblies and tooling, told a congressional committee in June that China's manipulation of its currency had contributed to the ability of Chinese companies to sell in the U.S. below cost.

"We cannot compete when the foreign currency of a major trading partner like China is so undervalued that it produces an overwhelming competitive advantage," he said. "If the yuan were 20 or 30 percent higher, this would solve my pricing problem . . . if the Chinese yuan were worth what it should be, I would not have a problem holding on to my customers."

Craig Lewis, a partner at the Washington law firm of Hogan and Hartson, said China's "non-market" designation for purposes of determining antidumping violations is outdated. An alternative would be for the U.S. to declare certain industries of the country to be free markets, provided they meet certain criteria. But that option isn't one U.S. trade officials favor for any country, Lewis said.

He said that for practical purposes, China is a free market, with many industries that have no state control over prices and input. "No country is immune to some type of state-controlled process, but it's a matter of degree," he said. "In my opinion, China crossed that threshold years ago. It's not completely open, but no country is." He said that if China lifted controls on its currency, "the non-market status could change."

Despite such problems, Gerdes predicts China's capitalist roots - after all, it's the country that invented paper currency - will trump its political contradictions. "The concept of China as a non-market economy will have to change," he said. "There's still a lot of work to be done in China to modify Chinese law, but to me, it's an exciting place because they're trying to change everything at once."

Gerdes said the country is making progress. "It's a huge country that doesn't have the rule of law as we know it," he said. "It's partially the concept that the place is so big and diverse that it's hard to police. And they haven't had the rules in place to cope with it."