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US faces limited options in China trade fight
Updated: 2006-02-20 08:45

Reminiscent of 1980s Japan-bashing, Washington is revving up criticism of China to rectify a burgeoning trade deficit, but its options are limited and any retaliatory actions could backfire, analysts say.

To appease constituents facing job losses in America's industrial heartlands, US lawmakers have proposed legislation to downgrade trade relations with China and impose punitive tariffs on Chinese goods flooding the United States.

The Bush administration, in an unprecedented move last week, announced the setting up of a task force that will specifically monitor China's compliance with its global trade obligations.

They include Beijing's enforcement of intellectual property rights, freeing up certain domestic industries and fulfilling market-opening commitments -- all of which were blamed for fuelling the record US trade deficit with China of more than 200 billion dollars.

Another reason cited was alleged Chinese government action to keep its yuan currency artificially weak to boost exports.

Speculation is mounting that the administration is considering branding China a currency manipulator in April, when Chinese President Hu Jintao is scheduled to visit Washington for talks with President George W. Bush.

The US Treasury Department is reportedly sounding out investors and experts about how financial markets might react to such a move.

Under a 1988 law, the Treasury is required to consider twice a year whether countries are pursuing exchange-rate policies "for the purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade."

The United States is the only country that has taken China to the WTO on a trade dispute since the world's most populous nation gained entry in the global trade body in 2001.

Washington also has filed more antidumping suits against Chinese products than against any other country in the world.

It is not the first time that a competing country has caused economic unease in the United States. In the 1980's, the United States was concerned over Japan's economic success, leading to actions that helped spark a stunning revival of American productivity.

"I think there are some comparisons, actually, and I think it's instructive for us to look back at the '80s and look at where we are," acknowledged US Trade Representative Rob Portman (news, bio, voting record), who was then attached to the White House.

"There was a concern that we just could not compete and win against Japan, no matter what. Look what's happened. You had a high technology revolution in this country following that. It was an essential wakeup call.

"My sense is that's where we are again, in a sense," said Portman.

But when Portman last week declared in a "top-to-bottom review" of China's trade practices that Washington would toughen its stance on Beijing's trade practices by setting up the task force, Congress was little impressed.

"It is amazing that in a comprehensive 29 page report, the Trade Representative fails to mention the 800 pound gorilla in the room -- how China manipulates its currency," said Democratic Senator Chuck Schumer.

His legislation seeking punitive tariffs on Chinese goods unless the yuan strengthens is due for another Congressional vote this spring.

Such moves may backfire and ignore other important issues, officials and analysts warn.

"The sad fact is we don't necessarily have much leverage to get China to change their exchange rate or their trade policies," said Nicholas Lardy, a China expert at the US based Institute of International Economics.

Even so, he said, the Chinese market "is pretty open," citing the more than 150 percent jump in US exports to China over the last five years.

China, he argued, also is in compliance with most of its WTO obligations. "Sometimes they were a little bit slow but they've pretty much done everything," he said.

On the foreign exchange front, a strong upward revaluation of the yuan could be counterproductive to US trade and monetary interests, warned Robert Burdekin, an economics professor at Claremont McKenna College in California.

"An exchange rate reduction could pose considerable financial risk to the United States by threatening the vast inflow of Chinese funds," he said, adding that Chinese capital provided critical support to the US trade deficit as well as the level of US interest rates.

China's reserves' accumulation of US bonds was 207 billion dollars in 2004 and total holdings were roughly 616 billion dollars, Burdekin noted.

Discouraging Chinese imports could also boomerang. "It would likely benefit (other) foreign producers who would then assume the supplier role, not US firms," he said.

Even where China is seen to be not complying with WTO rules, most notably intellectual property rights, private US firms are not very excited about cooperating with the authorities in hauling China to the WTO.

Portman himself acknowledged this.

"There are some US industries that have been hesitant to move forward on some enforcement actions. For many companies (China is) a profitable market. In some cases their most profitable market," he explained.

"So it is a reality that sometimes I find that we're a little ahead of our own industry."

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