The US-China trade 'disconnect'
By Russell Smith and Caroline Cooper
NEW YORK - Two important developments in US-China trade relations took place
simultaneously on one day this month. The day, April 18, started with the
arrival of Chinese President Hu Jintao in Washington state to begin his first
official visit to the United States. Hu's visit was intended to deepen US-China
economic relations amid rising protectionism in the US Congress and to assert
China's rising global influence.
In Washington, DC, the day also saw a changing of the guard on trade policy and
possibly of the Bush administration's approach to
China policy. President George W Bush announced that he was nominating current
US Trade Representative (USTR) Rob Portman to head the Office of Management and
Budget (OMB). The current Deputy USTR Susan Schwab will replace Portman.
Portman's departure, though not surprising given the current White House
shakeup, comes at a critical time as the Doha Development Agenda (DDA)
negotiations hang in the balance.
Many trade hands in Washington are saying that shifting Portman, a highly
regarded "rising star" in the Bush administration, from the trade portfolio to
the OMB sends a strong signal that the White House no longer places trade high
on its policy agenda, and in particular that there is little hope for a
substantively successful outcome in the DDA negotiations.
With regard to China, the emerging view seems to be that Portman's transfer may
reopen the door for Deputy Secretary of State Robert Zoellick to play a more
critical role in overall coordination of China policy. That, analysts say,
would mean that the Bush administration's China-trade agenda will shift away
from the goal of using the talks to integrate China further into the world
trading system and deepening bilateral trade relations with China to that of
responding to domestic pressures by increasing enforcement against China's
alleged unfair trade practices.
The notion that the US line on China trade was hardening may have been further
confirmed by Schwab's comments thanking Bush for the USTR nomination. She made
no specific mention of China but noted that "holding our trading partners
accountable through enforcement of existing trade laws and agreements will
continue to be a critical component of our trade agenda".
So, on one single day, on one US coast, the president of China was claiming to
see closer ties to the United States, promising more responsiveness on trade
issues, and describing the extensive economic relationship between the two
countries in favorable terms. On the other coast, many feel the president of
the US was signaling a shift in attitudes that could put additional tension on
that relationship. What are trade watchers to make of these parallel events?
Clearly, despite years of effort by administrations from both main US political
parties, the country still is unable to define either the goals or the
direction of its trade relationship with China. This is also true on the
strategic level, but in the context of trade, the "disconnect" seems to be even
more pronounced. The United States and China are speaking to each other about
trade on a continuous basis, but it is difficult to conclude that one side is
hearing or understanding what the other is saying.
An analysis of the events leading up to President Hu's meeting with President
Bush make clear that both governments are approaching bilateral relations with
very different objectives in mind: China recognizes the need for reform, but on
a limited basis and at its own pace. The Bush administration, faced with little
progress to date and substantial pressure from US business and a bipartisan
Congress to "do something about China", wants dramatic reform, on a defined
timetable, "or else", with the "or else" as yet undefined in any real manner.
Whether either side can find a path that accommodates the needs of the other is
critical to the future state of bilateral trade relations and could result in
improvement or a real and very adverse deterioration in the overall US-China
relationship.
US demands
The US and Chinese governments viewed President Hu's trip to the United States
in different ways for different purposes. For China, Hu's trip represented a
unique public relations opportunity both to deepen bilateral trade relations
and to underscore China's rising influence on the world stage. Accordingly, the
Chinese government regarded the trip as an official state visit, expecting all
the usual fanfare, including a formal state dinner.
The US administration, on the other hand, saw Hu's trip as a privilege Bush was
extending to a leader seeking respect on the world stage, a platform from which
to assert the role of Bush as leader of the only global superpower and an
opportunity for Bush personally to increase pressure on China to live up to its
trade obligations. As if to underscore this perspective, US officials rebuffed
China's request for a formal state visit, arranging only for a short meeting
between the leaders and a formal luncheon. Desiring a successful visit, the
Chinese government acquiesced to US wishes on the formalities of the visit.
The US trade agenda for the talks consisted of one primary goal:
"recalibrating" the bilateral trade relationship. Assistant USTR for China Tim
Stratford best described this notion at a recent hearing in which he said,
"While our bilateral trade relationship has been largely beneficial for both
the United States and China, it is not sufficiently balanced in the
opportunities it provides." He explained, "There is concern that the US-China
trade relationship lacks balance in opportunity as well as equity and
durability."
To seek more balance, Bush administration officials sought assurances from
China that significant efforts would be made to address the top three US trade
concerns at the US-China Joint Commission on Commerce and Trade (JCCT) meetings
on April 11. They include the worsening aggregate US trade deficit, China's
undervalued currency, and China's weak record on the protection of intellectual
property rights (IPR). Early last month, Commerce Secretary Carlos Gutierrez
went so far as to threaten cancellation of the JCCT meetings unless the Chinese
government was willing to address these concerns, specifically protection for
DVDs (digital video discs) and software.
Members of the US Congress from both parties joined the administration in
pressuring China to address key concerns, specifically the need to revalue the
yuan. Senators Lindsey Graham and Charles Schumer, sponsors of S297, a bill to
apply a 27.5% across-the-board tariff on Chinese imports unless the yuan was
revalued, visited China last month to impress upon Chinese leaders the
political and economic importance of revaluation.
In a surprise turn of events, the senators came away from the trip with what
Schumer described as "a real feeling that the Chinese realized that pegging
their currency is not only bad for America, but bad for China as well".
Consequently, both senators decided to delay consideration of their legislation
to not later than September 29, but with one caveat - they would seek earlier
consideration if there are no indications that China is moving ahead with
currency reform before that date.
Another reason that Graham and Schumer delayed consideration of their
legislation was the introduction of another bill, S2467, by Senate Finance
Committee chairman Charles Grassley and ranking Democrat Max Baucus. The
Grassley-Baucus bill, which was introduced on the same day Schumer and Graham
decided to delay consideration of theirs, represents a departure from the
constant threats of action and negative rhetoric from lawmakers about China's
undervalued currency, which have yielded so few results.
The bill reflects serious concern on the part of both Grassley and Baucus about
the direction of US-China trade relations, and offers solutions to key problems
that could yield significant support from senators. For example, S2467 contains
language to repeal the 1988 Exchange Rates and International Economic Policy
Coordination Act and provides a new mechanism to address misaligned currencies
that adversely affect the US economy. Specifically, the bill requires that the
United States enter negotiations with any country deemed to have a misaligned
currency and, if necessary, impose some form of economic sanction if such
negotiations fail to produce a positive result.
China's response
The Chinese government responded to US demands by making commitments to move
forward on four major issues at the JCCT meetings. In doing so, the Chinese
government hoped to mitigate harsh rhetoric from the US Congress and pave the
way for a successful visit by President Hu. First, Chinese officials agreed to
increase market access for US exporters by beginning the administrative process
that could lead to rescinding the ban on US beef, adjusting equity
capitalization requirements in the telecommunications sector, and removing
barriers to trade in medical devices.
Second, the Chinese government agreed to improve transparency by joining the
World Trade Organization's Government Procurement Agreement and requiring all
levels of government to publish trade measures in one journal.
Third, the government agreed to address IPR concerns by requiring the
pre-loading of legal operating system software on all computers produced or
imported into China, ensuring the use of legal software in government and
enterprises, pursuing IPR cases raised by the US government and initiating a
new action plan to improve IPR enforcement.
Finally, in an effort to redress the bilateral trade imbalance, a business
delegation accompanying Chinese officials signed purchase contracts with
companies such as Boeing and Microsoft worth $16.2 billion. No commitments were
made regarding foreign exchange.
Many US opinion leaders and decision makers expressed the view that the JCCT
commitments were not as definitive or extensive as the United States would have
liked. Senator Grassley reflected this view: "It looks like there were some
positive developments at this year's meeting. But lofty statements coming from
a meeting don't mean a thing if there isn't follow-through. So the question now
is, how long will it actually take to achieve the good objectives, including
reopening the Chinese market to US beef? I'll be keeping a very close eye on
what happens in the weeks and months ahead."
Outlook
With the mid-term congressional elections fast approaching in the United
States, Bush must demonstrate visibly to the public that he will not be
satisfied with half-measures on the Chinese currency, IPR and overall trade
imbalance issues. Therefore, the Treasury Department can be expected to move a
step closer, if not all the way, to citing China as a currency manipulator in
its forthcoming report due at the end of this month.
The Bush administration will also give more consideration to bringing a World
Trade Organization case against China for failing to show evidence of efforts
to enforce IPR laws, specifically as they relate to criminal activities. These
efforts may well stave off potential action by the current Congress on pending
China-related legislation. But they will not be enough, especially if the
Democratic Party is able to take control of either the House of Representatives
or the Senate when the new Congress convenes next January.
In their joint remarks after their April 20 meeting, Bush and Hu were cordial,
and showed little obvious disagreement or tension on trade, with Hu
acknowledging the legitimacy of US complaints about the yuan and IPR
enforcement and Bush agreeing that these problems needed to be addressed. This
was to be expected - given the investment both leaders had in having their
first summit be seen as successful.
Although Hu agreed to continue working to address US concerns, it is unlikely
that in the absence of additional concrete actions this kind of general
statement is enough to placate the factions in the US who are hyper-critical of
China. The lack of positive, definitive forward movement in the relationship
means that the direction of trade relations remains undefined and therefore at
risk of serious confrontation unless such movement takes place in the not too
distant future.
In short, the United States and China need to end the "disconnect" and start
some substantive and productive communicating as soon as possible.
Russell Smith and Caroline Cooper are with Willkie Farr &
Gallagher LLP.
(Posted with permission from KWR
International, Inc, (KWR), a consulting firm specializing in
the delivery of research, communications and advisory services.)
