Trade rift awaits Obama in China

Recent trade spats and charges of protectionism threaten to undermine what has evolved over the past two decades into the most important bilateral economic partnership in the world, many economists say.

The tit-for-tat trade battle between the United States and China, where President Obama arrives Sunday, has involved Chinese tires, coated paper and steel pipe imported into the U.S. and American exports of poultry, autos and auto parts to China.

China exported nearly $338 billion worth of merchandise to the United States last year, dwarfing the $71 billion worth of U.S. goods China imported.

America’s seemingly insatiable appetite for goods imported from China has been instrumental in fueling China’s soaring economic growth rates, which have hovered in the double-digits for decades. At the same time, China’s prodigious savings and the recycling of its surging trade surpluses have been indispensable in financing the U.S. government’s exploding budget deficits.

“China is definitely [America’s] most important bilateral economic partner, because of China’s growing role in the world economy and its Asian neighborhood, which is the most dynamic region in the world,” said Steven Schrage, an economic specialist at the Center for Strategic and International Studies.

Eswar Prasad, a Cornell University economist and senior fellow at the Brookings Institution, thinks “the bargaining strengths of the two countries are finely balanced.” But he agrees the stakes are high. He fears “a dangerous game of chicken that could easily spin out of control if the desire to pander to domestic audiences trumps rational collective policymaking in one or both countries.”

The magnitude of the U.S.-Chinese economic relationship is stunning.

During the last 10 years, China has racked up an estimated $1.7 trillion in cumulative trade surpluses with the United States. China’s investment in U.S. Treasury securities has skyrocketed from $60 billion at the end of 2000 to $800 billion in August, making it the biggest foreign holder of U.S. government debt in the world. China also holds more than $400 billion of U.S. agency debt, including securities issued by Fannie Mae and Freddie Mac, which are now effectively guaranteed by the U.S. government.

This symbiotic relationship produced the massive global imbalances that many analysts blame for igniting the worst financial crisis and deepest global recession since the Great Depression.

The fallout from the worldwide economic downturn devastated global trade, which reportedly cost China 20 million manufacturing jobs and has produced a double-digit unemployment rate in the United States for the first time in more than a quarter-century. In the wake of the global upheaval, accusations of trade protectionism and currency manipulation have proliferated around the world.

China charged that Mr. Obama’s September decision to slap a 35 percent tariff on imported Chinese tires represented “a serious case of trade protectionism.” China responded by filing a complaint with the World Trade Organization and opening dumping investigations of U.S. exports of chicken and auto parts.

After the U.S. decision this month to levy duties on steel pipe from China, the Chinese Ministry of Commerce ratcheted up the rhetoric, accusing America of “abusive protectionism” that has been “rarely seen in history.”

Imposing the tariff on tires was a “purely political” decision by President Obama, who was “looking to pick a fight with China over trade to satisfy the labor unions,” said Daniel Griswold, a trade specialist at the libertarian Cato Institute, who regards the U.S.-Chinese trade relationship as “mutually beneficial.” American consumers benefit from China’s low-cost goods, and Chinese savings help to keep U.S. interest rates down and prevent federal borrowing from crowding out private investment, Mr. Griswold said.

Not everyone is so sanguine about the bilateral trade relationship.

“China’s leaders have shown absolutely no interest in working cooperatively with the United States to significantly reduce trade and investment surpluses that helped trigger the global economic crisis and that still endanger the world economy,” said Alan Tonelson, an analyst at the U.S. Business and Industry Council, which represents small and medium-sized domestic manufacturers. “Therefore, the time for talking trade with Beijing is over. President Obama needs to show real leadership, use America’s still-decisive market power and act unilaterally to rebalance bilateral trade flows.”

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