What is America’s China problem?


Richard Moore

Original source URL:

What is America's China problem?
By Steve Schifferes 
BBC News economics reporter

Strained trade relations between the US and China are dominating talks between 
US President George W Bush and Chinese President Hu Jintao in Washington.

The US fears China's fast-growing exports will hit American jobs.
US manufacturers claim that China's undervalued currency is to blame.

But China is also a growing market for US goods, and many US firms are also 
direct investors in Chinese factories.

So how justified are the US complaints?

Mutually beneficial

In theory, both China and the US agree that free trade between the countries 
will be of long-term benefit to both - a view exemplified by China's entry into 
the World Trade Organization in 2001.

President Hu endorsed this view when he visited a Boeing factory, saying it was 
"a living example of the mutually beneficial co-operation and win-win outcome 
that China and the United States have achieved from trade".

But despite China's recent trade deals with Microsoft and Boeing, the country's 
huge trade deficit with the US soared to more than $200bn ((Pounds) 112bn) in 

And as China's trade surplus has grown, it has become one of the largest buyers 
of US Treasury bonds, which help fund America's large budget deficit.

Currency manipulation?

Many in Washington DC are convinced that unfair Chinese trading practices are 
behind these figures.

The US has pushed for restrictions on Chinese textile exports, which were 
imposed last year, and now many US manufacturers insist that China has 
undervalued its currency to keep its manufactured exports cheap.

They argue that China should increase the value of its currency, the yuan, by up
to 40% to restore the competitiveness of US goods.

Beijing - which raised the yuan's value against the dollar by 2% last year - has
denied claims of currency manipulation and says it will introduce a 
free-floating currency only gradually.

Now, however, the US position has been given partial support by the World Trade 
Organization (WTO), which says currency reform could help ensure China's boom 
does not get out of hand.

In its trade review of China, the WTO says: "A more flexible exchange rate could
enable China to operate a more independent monetary policy, which would be 
better suited to ensuring a low and stable rate of inflation."
Global imbalances

However, it is unlikely that either side can really move quickly on this issue.

A big revaluation of the yuan would upset many of China's foreign investors, who
would suddenly find it much more expensive to build or buy factories there.

That could trigger a sharp slowdown in China's rate of economic growth, which is
dependent on exports.

Nor would the US unambiguously benefit from such a move.

The currency realignment, if financed by the sales of US Treasury bonds, could 
trigger a run on the US dollar - a sharp fall in its value.

That, in turn, could mean higher inflation and higher interest rates in the US.

Many economists argue that any currency realignments would have to be gradual, 
managed and global, involving not only China but other Asian currencies and the 
euro too.

Trade rows

Meanwhile, the trade rows between the US and China are likely to continue.

The WTO's report has given plenty of ammunition to US arguments that China has 
not yet fully embraced open trade commitments, such as non-discrimination 
against foreign companies and fair and open enforcement of trade law.

The WTO says clearer investment and trade guidelines are needed to ensure a 
level playing field between state and private enterprises, and says that China 
continues to manage trade to ensure domestic supplies.

Intellectual property rights are also a continual source of friction between the
US and China.

"Effective enforcement of intellectual property rights is also needed to ensure 
an investment environment conducive to the development of innovation and foreign
investment," the WTO notes.

Amidst the rows, China continues to play a key role as the Doha round of global 
trade talks enter a critical phase.

The US and the EU are pressing the fast-growing economies like China, India, and
Brazil to open their manufacturing and service sectors further to Western goods 
in return for the liberalisation of agricultural trade, but they have formed a 
united front known as the G20 to argue their case.
Domestic rebalancing

And the WTO notes that in the long term, the future economic development of 
China will probably require a shift from export-oriented manufacturing to 
service sector growth.

Such a shift would boost the domestic economy and would help absorb the millions
flooding into China's cities in search of work.

It said that future growth "may require a reappraisal of current policy of 
giving priority to attracting investment in export-oriented, capital-intensive 

But the US will also have to address competitiveness issues of its own, 
including the effect of the huge budget deficit on domestic investment, in order
to lower its trade surplus - which is not only with China.

For both countries, such decisions would require painful adjustments that could 
threaten key domestic contituencies.

For the time being, rhetoric is likely to prove much easier than action.
Story from BBC NEWS:

Published: 2006/04/20 09:31:21 GMT


Escaping the Matrix website     http://escapingthematrix.org/
cyberjournal website            http://cyberjournal.org
blog:   cyberjournal forum      http://cyberjournal-rkm.blogspot.com/
blog:   Achieving real democracy        http://harmonization.blogspot.com/
blog:   for readers of ETM      http://matrixreaders.blogspot.com/
blog:   Community Empowerment   http://empowermentinitiatives.blogspot.com/
Blogger made easy               http://quaylargo.com/help/ezblogger.html

subscribe cyberjournal list     mailto:•••@••.•••
Posting archives