Paulson in China: Tread
softly, forget the big stick By Jing-dong Yuan
As US Treasury Secretary Henry Paulson
began his visit to China on Tuesday, he brought
with him what has been dubbed a "dream team" of
half a dozen cabinet secretaries including those
of Commerce, Energy, Labor, Health and Human
Services, the US Trade Representative and, most
significantly, Federal Reserve chairman Ben
Bernanke.
The mission? To address what
Washington views as the perennial
irritants in Sino-US economic
relations - trade imbalance, undervaluation of the
Chinese currency, lack of
intellectual- property protection and, what is
perhaps the most important, US companies' access
to China's market.
Since becoming treasury
secretary last July, Paulson has become the
principal US interlocutor by initiating high-level
economic dialogue with Chinese leaders. During his
September visit to China, Paulson not only managed
to meet both President Hu Jintao and Premier Wen
Jiabao, he generated a lot of expectations that as
a recognized "China hand" - as chairman and chief
executive officer of the investment bank Goldman
Sachs, Paulson visited China more than 70 times -
that he could deliver on charting a new course for
US-China economic relations without resorting to
trade wars between the two countries.
While the Chinese currency has undergone
modest appreciation since the summer, it is still
considered significantly undervalued. That,
together with government subsidies, underpins
sustained Chinese exports globally, but especially
to the United States, registering a high of US$23
billion in September.
US lawmakers such as
Senators Charles Schumer and Lindsay Graham have
proposed a 27.5% across-the-board tariff on all
Chinese imports until China revalues the yuan.
While Schumer praised Paulson's efforts to engage
the Chinese to address US concerns, he could
reintroduce the bill should Paulson's mission fail
to achieve any meaningful result.
However,
the most serious complaint these days is about the
alleged denial of market access to China for US
businesses. As US manufacturing sectors continue
to lose jobs, there is growing pressure on the
administration of President George W Bush and
Congress to exert pressure on China to open its
market more so that US companies have a fairer
chance of competition, in compliance with its
obligations to the World Trade Organization.
Paulson's China visit takes place at a
time of increasing trade frictions between the two
countries. With Democrats soon to control Congress
after last month's mid-term elections, the
administration could feel intense pressure to push
for changes in what are generally regarded as
China's mercantilist trade practices. Given the
high stakes and expectations, Paulson will need to
deliver on substantive progress in obtaining major
concessions from Beijing. This seems to be a
mission impossible.
There are both
political and economic reasons for China to resist
calls for its currency revaluation, slowing down
its exports, or opening its markets to foreign
competition. Politically, Chinese leaders face
mounting challenges to maintain sustained economic
growth rates, to create employment opportunities
to absorb 15 million people moving into the labor
market annually. Given the nature and structure of
China's economy, continued growth depends on
sustained exports.
China's reforms over
the past nearly three decades have also engineered
significant changes in how public goods are
provided. Increasing portions of health care,
education, housing and other social-wealth
spending are borne by individuals, resulting in
high saving rates and hence lowered overall
consumption. This in turn leads to significant
portions of gross domestic product being
export-driven, driving up China's trade surpluses
and US trade deficits with China.
Often
ignored in the assessment of China's export
momentum are the dynamics of globalization where
multinational corporations and retail chains make
their investment and purchasing decisions based on
profit margins, which continue to favor China as a
major hub of global manufacturing.
However, at the same time, the growing
economic and strategic ties between the two
countries make any quick fixes difficult to
achieve. There will be strong resistance to the
kind of economic reforms that Washington is
calling for.
First, Beijing does not see
America's economic woes as all of China's making,
reasoning that Washington should also think about
the structure of US economy, its spending patterns
and lack of adequate savings. Second, China could
not afford to bend under US demands because of the
potential risks to economic growth and social
stability. Third, Chinese leaders point out that
they have already introduced noticeable reform
measures, including the steady appreciation of the
yuan since summer.
Finally, Beijing argues
that China has become one of the fastest-growing
markets for US-made goods and services in recent
years. The current trade imbalances, however
exaggerated they are from the US side, can also be
attributable to Washington's restrictive policies
when it comes to US exports of high-tech
commodities to China.
There are also
broader strategic interests that could be
negatively affected by the pending trade
frictions. China has played a critical role in the
six-party talks to defuse and eventually look for
a solution to the North Korea nuclear crisis. The
second phase of Round 5 of the talks is set for
next Monday, and this resumption after more than a
year's suspension is due in no small measure to
Beijing's painstaking diplomacy.
The Bush
administration can ill afford losing such a
critical partner at a crucial moment when it not
only needs to make progress on North Korea, but
also to head off another potential crisis related
to Iran's nuclear developments. As a permanent
member on the United Nations Security Council,
China's endorsement, or at least its absence of
opposition, would be critical in ensuring that any
Security Council resolutions could be adopted.
Paulson certainly needs to convey the
message and US frustration to Chinese leaders but
also to convince them that it is to China's own
interests that it should adopt bolder reform
measures to open its economy further, including
allowing greater access to its markets by foreign
companies, currency valuation, and better
protection of intellectual property.
But
the key to securing Beijing's cooperation on these
reforms will require patience and diplomatic
skills that are informed by a realistic assessment
of the political and economic feasibility, rather
than driven by political expedients. The best that
the Paulson mission could achieve is perhaps some
modest progress but with a consensus with his
Chinese counterparts on a specific roadmap that
will serve as the guide for US-China economic
relations and strengthen overall bilateral ties in
the years ahead. Therein lies the challenge.
Jing-dong Yuan is associate
professor of international policy studies at the
Monterey Institute of International Studies.
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