[Far Eastern Economic Review] TRADE The One-Two Punch China is coming under fire in the United States on two fronts. Politicians and others accuse Beijing of stealing U.S. jobs. But growing anger at the slow pace of trade reforms may prove the bigger issue
By Murray Hiebert/WASHINGTON and David Murphy/BEIJING Issue cover-dated October 02, 2003 THE HONEYMOON is well and truly over. Much of the euphoria in the United States that accompanied China's entry into the World Trade Organization nearly two years ago has mutated into disappointment and anger. But the rhetorical hurricane brewing across the Pacific consists of two separate winds. One is largely political and charges China with using an undervalued currency to snare American jobs. It may well die down after the U.S. presidential elections in November 2004. The second has more serious long-term implications because the U.S. business community is growing more impatient in its calls on Beijing to do more to meet its pledges. In comments prepared for delivery to the U.S. Trade Representative's office, U.S.-China Business Council chief Robert Kapp warned Beijing about its "apparent loss of clear momentum" in implementing obligations to comply with its commitments to the WTO. Kapp, who strongly supported China's WTO membership, forecast that Beijing's "failure to progress decisively on key WTO commitments in China could itself become the product of tit-for-tat frictions" with the U.S. Hurricane Isabel postponed the September hearing in Washington on China's compliance. A U.S. Chamber of Commerce report released on September 16 said China's compliance record was "uneven and incomplete." It added: "Unless this picture improves, there will be an increasing crescendo of complaints . . . A number of companies are already publicly expressing the view that China is dismissive of global trade rules and commitments." The reports by the two key business groups--which last year showed more patience with Beijing's difficulties in complying--followed a surge of criticism by American politicians and corporate leaders blaming China for the loss of 2.7 million industrial jobs in the past three years. They charge Beijing with keeping its currency undervalued, giving China an unfair export advantage that led to a record U.S. trade deficit of more than $100 billion last year. The renminbi is pegged to the dollar, so the U.S. currency's slide this year has made Chinese exports even cheaper. Anger in the United States has grown for months as politicians in both parties compete to hit Beijing for its failure to revalue. In early September, a bipartisan group of senators led by Charles Schumer, a New York Democrat, introduced draft legislation slapping a 27.5% tariff on Chinese exports to the U.S. unless Beijing revalues. A Senate hearing on September 11 almost turned into a referendum on China trade policy. "Over the next dozen years in this country, our biggest economic challenge . . . will be how do we keep too many of our jobs from moving to China," said Lamar Alexander, a Tennessee Republican. Manufacturers are mounting their own initiatives to confront China. The National Association of Manufacturers, consisting of 14,000 U.S. companies that pushed for China's entry into the WTO, has vowed to join other industrial and agricultural groups in filing a trade complaint against Beijing for allegedly manipulating the renminbi to gain an unfair pricing advantage. As the 2004 elections approach, President George W. Bush's administration is seeking to appear responsive. On September 15, Commerce Secretary Donald Evans complained about a list of Chinese trade barriers and announced the formation of a new Unfair Trade Practices Team. The Group of Seven--the world's wealthiest nations--also expressed concern. On September 20, the G-7 called for more flexible exchange rates--without directly naming China. Beijing fended off the criticism with a formula it has used at least since the 1997 Asian financial crisis. "We're committed to liberalization, but I can't give you a very clear timetable of how long it will take," said Li Ruogu, deputy governor of the Bank of China. China is unswayed by U.S. demands to appreciate the renminbi, calls expected to be repeated when Evans visits Beijing later this year. In September, Chinese officials promised visiting Treasury Secretary John Snow limited action. But they avoided offering a timetable for changes on the renminbi, pegged at about 8.28 renminbi to the dollar for almost a decade. For Beijing, a stable currency is a key to economic stability and the noises from Washington are making China the scapegoat for U.S. job losses. "It's related to the upcoming U.S. presidential election," says Wang Yong, a professor of international political economy at Peking University. "The government is more open to pressure from interest groups now." In reality, China's overall global trade surplus is quite small and the huge surplus it enjoys with the U.S. is mainly the result of an increasingly capable Chinese economy competing directly with other developing countries more than with the U.S. "Mexico has free trade with the U.S. and China does not. Yet Mexico is losing jobs to China right now," says Columbia University economist Joseph Stiglitz. This is a reflection not of unfair trade practices, the former World Bank chief economist and Nobel Prize winner says, but of growing efficiencies in China's economy. The currency spat is a result of "Bush trying to shift blame from his macro-mismanagement to the Chinese," says Stiglitz. "America has no grounds for complaint." Many economists anyway doubt that a revaluation of China's currency by the 15%-40% demanded by American industry groups would make much of dent in the U.S. trade deficit. "If they were to revalue their currency by about 20%, I estimate that the effect on the bilateral trade with the United States would be to reduce their surplus by about $10 billion," economist Nicholas Lardy told the September 11 Senate hearing. And Lardy, a China specialist at the Institute for International Economics in Washington, warned that the end result of China floating its currency could be the opposite of what senators wished for. "I think it is quite likely that if China floated its currency, that the value of the renminbi would depreciate, not appreciate," he said. "I think it has the potential to . . . cause many problems in the [Chinese] domestic economy, with significant implications throughout Asia, and that it would move the currency in a direction that I think would be contrary to our interests." The gloves may be off in Washington, but Beijing is anxious to escape being caught in the crosshairs as the election campaign heats up. China wants to avoid the re-emergence of the tough rhetoric that characterized the early months of the Bush administration. Foreign Ministry spokesman Kong Quan says Beijing wants "Sino-U.S. trade friction to be resolved appropriately through consultation." Equally shy of conflict are the U.S. multinationals with giant manufacturing operations in China and whose exports contribute considerably to the trade deficit. Seven U.S. companies were in the top 50 exporters from China last year. "Other factors need to be taken into consideration--such as that U.S. manufacturers are so heavily invested in China and exporting out of China to the U.S.," a spokeswoman in Hong Kong for Motorola says of the currency row. Motorola has invested $3.4 billion in China and last year exported $2.6 billion worth of goods--though it refuses to say how much went to the United States. But even business groups that want to distance themselves from the campaign over the renminbi support calls for Beijing to adhere more closely to its WTO commitments. In their reports, the U.S. Chamber of Commerce and U.S.-China Business Council gave a litany of complaints ranging from Beijing's lack of transparency to its failure to rein in rampant piracy of intellectual property. Kapp, who last year said Beijing's efforts to stick by its WTO commitments amounted to a "half-full" glass, this year saw "an apparent weakening of government resolve on key WTO implementation issues," according to his draft comments. "Transparency . . . remains a very serious problem," he said. So does protectionism. Kapp said companies in his council complain of "a clear indication of out-and-out protectionism on the part of government bureaucracies defending their bureaucratic prerogatives and the economic interests of their domestic constituencies." The piracy of intellectual property causes more heartburn for foreign firms. The International Intellectual Property Alliance estimated losses due to piracy by China last year at $1.9 billion. Some 10%-15% of over-the-counter pharmaceuticals sold outside hospitals are counterfeit. Myron Brilliant, the U.S. Chamber of Commerce vice-president for Asia, wrote in his report that without criminal sanctions including imprisonment "it will be difficult to significantly curtail the counterfeiting of pharmaceuticals in China." Chinese officials insist they are committed to meeting obligations. Foreign Ministry spokesman Kong said Beijing's "stand and determination will not be weakened," even though China had "met some problems and unexpected difficulties in fulfilling its WTO commitments." Although Beijing has largely fulfilled a pledge to lower tariffs on schedule, its to-do list remains long, according to Brilliant and Kapp. Progress in reducing non-tariff barriers in agriculture is slow. So is action on a promise to relax restrictions on U.S. companies distributing products in China. Beijing still has excessive capitalization requirements for banks, insurance companies and telecoms-service providers and is two years late in opening car financing to foreign players. Kapp and Brilliant warn that China's failure to address these problems could lead to renewed turbulence for political and commercial ties between Beijing and Washington. "Absent more progress toward fulfilling its WTO commitments, concerns about China will only rise," Brilliant said. "Without tangible improvements, there will be political consequences as well as a possible souring of business views about the market."
