- The Washington Times - Monday, May 19, 2003

Whenever manufacturers get together today, the topic of conversation invariably turns to China. The threat of SARS dominates today’s headlines, but their greater concern is one of economics.

With astonishing speed, China is emerging as a global manufacturing powerhouse. Backed by an inexpensive labor force, rapidly improving production quality, new sources of capital, a more dynamic private sector and a deliberately undervalued currency, China is supplying a growing range of products to the global marketplace.

Manufacturers are particularly worried because China’s production is quickly moving beyond the traditional areas of textiles, toys, and footwear — and into higher-technology production. Machinery imports from China are up nearly 50 percent in the last 12 months. Furniture imports are up over 40 percent, organic chemicals by 40 percent. The list goes on.

Small manufacturers despair of competing against low-cost Chinese products. But even successful multinational corporations express concern and tell us that, unless things change, it is only a matter of time before they have to move production to China. The same story is heard from firms in Japan, Europe and even many developing countries.

Last year, America’s trade deficit with China passed the $100 billion mark, the first time the world has seen such a large bilateral imbalance. Imports from China are six times as large as our exports, and this bilateral trade deficit is now one-fourth of our global trade deficit. If these trends continue, within five years our deficit with China would more than triple to over $300 billion — surely igniting a blaze of protectionism.

Protectionism, however, is not the answer. It would impose a huge tax on U.S. consumers, particularly lower and middle income families. And it would trigger cycles of global retaliation that would rebound and hit the United States hard.

The better alternative is to insist that our bilateral trade follow market-driven rules that level the playing field and allow U.S. producers to use their own formidable competitive advantages. But we need a strategy to make this work.

First, we must ensure that China complies with world trade rules. China recently joined the World Trade Organization (WTO) and made commitments to open its market and to trade by the same rules as other nations. We need to hold China to these commitments. Addressing the rampant abuse of intellectual property rights, the lack of regulatory transparency and lax trade law enforcement by local authorities should be high priorities.

Second, we must press China to end the manipulation of its currency and allow the yuan/dollar exchange rate to be determined by the market. This is by far the largest factor distorting our trade. Since 1994, the Chinese government has artificially suppressed the value of the yuan in order to gain a competitive advantage. In doing so, the Chinese government has accumulated $280 billion in foreign exchange reserves — $75 billion last year alone. By some estimates, the yuan is 40 percent undervalued, giving Chinese-made products a huge competitive advantage over U.S. manufactured goods.

Third, beyond exchange rates, we must also ensure that the development of Chinese industry follows market principles and does not benefit from direct or indirect subsidies that distort trade flows. We hear too many reports from U.S. manufacturers that Chinese imports cost less than the cost of raw materials. In our dialogue with China, we must insist that the prices of traded goods are determined by real economic costs and not costs artificially set by government bureaucrats.

Fourth, we must take firm actions to end China’s rampant counterfeiting of U.S. and other products. Today, China is the epicenter of world counterfeiting, costing us tens of billions of dollars in lost exports and the related jobs. Moreover, counterfeit products pose significant risks to health and safety — such as in bogus pharmaceuticals or phony brake linings. This simply cannot be allowed to continue.

Finally, we must undertake a large joint public-private export trade effort to increase U.S. exports to China. Others, including Japan and the European Union, sell much more to China than we do. As China opens its markets, U.S. companies need to increase their marketing efforts. But greatly expanded Commerce Department and other promotion assistance is also needed, such as the establishment of a network of American Trade Centers.

Too much is at stake to ignore the China challenge. We cannot afford to allow our manufacturing base to shrink to the point at which demands for protectionism become irresistible. We can have a strong bilateral trade relationship with China that elevates the wealth of both countries through reliance on rules that foster free markets. But we must act now to make it a reality.

Jerry J. Jasinowski is president of the National Association of Manufacturers.

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