- The Washington Times - Monday, March 10, 2003

WASHINGTON, March 10 (UPI) — U.S. relations with China are likely to flare up in the not-too-distant future if trade imbalances aren't addressed soon, even though the communist country might no longer be a military threat, an analyst warned Monday.

As the United States prepares to attack Iraq on the one hand while grappling with increased threats from North Korea on the other, China has become closer to the Bush administration as the two countries find common foreign-policy ground.

"On issues of security, (the United States and China) share common interests … against terrorism, North Korea … and desire to keep stability in the region," said Alan Tonelson, a fellow at the U.S. Business and Industry Council.

Tonelson said that one reason for the convergence in foreign-policy interests was China's recognition of U.S. military might, against which it can't compete and sees as "pointless to challenge."

It's in China's interest to see military and economic stability in East Asia, particularly given its high dependence on foreign investment to sustain domestic growth.

Likewise, although the Communist Party retains a firm grip on politics and human rights activists still criticize the country's record, there has been improvement on the political front, even if it has lagged economic progress.

But despite convergence on security issues, Chinese and U.S. trade interests diverge widely.

Many argue that China produces large volumes of less advanced products for the U.S. market, while U.S. companies export high-technology goods to China, but the division is becoming blurred, Tonelson said.

"Don't kid yourself. Intel is making semiconductors in China … (Chinese factories) aren't just producing toys," he said, adding that Chinese manufacturers were likely to make increasingly technology-intensive goods that compete directly with U.S. companies.

China's accession to the World Trade Organization in December 2001 has improved foreign access to its markets and boosted Chinese efforts to become more transparent. Moreover, many U.S. executives say that China's markets are actually more open than Japan's.

So while one major concern for U.S. corporations trading with Japan at the height of the two countries' trade friction in the late 1980s and early '90s was deregulation, there's been no such problem with the Chinese authorities.

Still, for China to keep growing rapidly, it's necessary for overseas funds to keep flowing into China and Chinese goods to keep flowing into U.S. markets, Tonelson said.

"The Chinese will say they support free markets … but they also insist at the same time on having their own industries," be it in pharmaceuticals, vehicles, computers, or other advanced goods, Tonelson said. Being involved in every major sector isn't always optimal industrial planning — and it often means that government subsidies are required.

According to the U.S. Commerce Department, 40 percent of China's exports are shipped to the United States, and 26 percent of China's economy is dependent on exports.

"And that's despite the enormous amount of money pumped into the public sector to spur domestic demand … effectively, there's no domestic demand, and the Chinese economy is highly dependent on exports, largely to the United States," Tonelson said.

But given geopolitical tensions and growing mutual dependence, heated debate over trade imbalances is unlikely to occur — for now.

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