Trading China

Trading China

After more than a decade of manufacturing outsourcing by Western companies and slow but steady economic reform by Beijing, China is the United States’ second-largest trade partner and appears to be catching up fast to Canada. It’s time, then, that the U.S. decides what kind of trade relationship it wants with China.

The U.S. and China certainly have a trade relationship, of course, one built on the hundreds of billions of dollars worth of goods and services that pass between the countries each year.

U.S. trade with China totaled $40.6 billion in July and was worth $242.5 billion in the first seven months of 2010, according to U.S. Census statistics.

But disputes over government subsidies and currency controls reaching a crescendo this fall are reminders that the trade relationship has been built in fits and starts over the years, without much design, and it’s showing signs of stress.

U.S. companies are calling on the government to fix those stresses, but the truth is, any steps the White House takes in the wide range of disputes now under scrutiny can only have a small impact on the enormous flow of trade between the U.S. and China.

The biggest of the disputes is over China’s currency, which Beijing keeps at an artificially low rate to the U.S. dollar, helping fuel the huge flow of exports across the Pacific from China.

There are signs China is moving more rapidly to change its currency policies.

A foreign exchange regulatory official was quoted as saying this month that the yuan trades within too narrow a range, signaling there is strong debate in Beijing over loosening currency controls.

“This paper argues that a floating exchange rate need not be feared, but it doesn’t advocate a floating exchange rate,” Guan Tao, an official in the state administration of foreign exchange, wrote in an essay reported on by The Wall Street Journal.

But anyone who believes China will suddenly begin to buy large amounts of U.S.-made goods will be disappointed when the yuan starts to float upward, as it should and inevitably will. The outsourced manufacturing industry that’s been built in China over the past decade is deeply entrenched, and it’s built on a range of cost factors that would change only incrementally if the yuan appreciated on world markets.

While the U.S. is focused on currency, other countries are tapping into China in other ways.

For Germany, China replaced the United States last year as the country’s No. 1 export market. Germany’s exports to China grew 55 percent in the first half of this year, and the country’s overall trade relationship with China is less than a third the size of U.S.-China trade, but far closer to balance.

Germany does that even though no one has ever accused the country of having anything close to a low-cost labor force. Instead, there is a concerted effort to bring German goods to Chinese consumers, pulling trade policy and industrial policy together.

There is no question China must take actions to be a fair and equal trading partner. But U.S. businesses that believe the relief will come from Beijing, or even from Washington, should keep expectations for the benefits in balance.

Paul Page is executive director of The Journal of Commerce. He can be contacted at 202-355-1170, or at ppage@joc.com. Follow Paul Page on Twitter, www.twitter.com/paulpage.