Tuesday, April 10, 2007

Chinese officials and state-run media again proclaim Beijing will strive to reduce its “excessively large” trade surplus. This is meant to head off increasing action in Washington to counteract unfair trade practices that have generated a 5-1 imbalance between China’s exports to the U.S. and its imports.

Though Beijing has often tried to downplay the size of its trade surplus, last month The People’s Daily proudly proclaimed China’s success: “In 2006, China recorded a sizzling economic growth of just under 11 percent, largely powered by strong exports that rose by 27 percent to $969 billion U.S. The soaring exports expanded China’s trade surplus to a record $178 billion, up 74 percent.”

The U.S. Trade Representative’s 2007 agenda, released in March, reminded the reader, “The terms of China’s accession to the WTO [World Trade Organization] include a unique, China-specific safeguard mechanism. The mechanism allows a WTO member to limit increasing imports from China that disrupt or threaten to disrupt its market if China does not agree to take action to remedy or prevent the disruption. The mechanism applies to all industrial and agricultural goods and will be available until Dec. 11, 2013.”

The 2006 U.S. trade deficit of $235 billion with China has certainly disrupted a number of American industries. Unfortunately, these Section 421 cases are slow, expensive, bureaucratic affairs that companies must undertake piecemeal.

The Commerce Department has offered some help to firms by finally abandoning arcane methodology objections to applying countervailing duties to China’s “nonmarket economy.” Economies still dominated by state-owned banks and industries, like China, are the most able to use subsidies, along with nontariff barriers, currency manipulation and other elements of industrial policy, to gain unfair advantages. Their lack of transparency means they require stronger enforcement tools than do more open economies.

The government must do its duty in the realm of foreign affairs to protect the national interest. It was thus an important first step for the U.S. to file a case at the WTO against Beijing for using illegal subsidies. “We are committed to challenging China’s WTO-inconsistent practices that harm American workers and businesses,” said USTR Susan Schwab. “China’s use of market-distorting subsidies creates an uneven playing field.” The USTR announced Monday it is taking China before the WTO over intellectual property theft and for restrictive rules on distribution of American CDs, DVDs, books and other media products. The 2007 USTR agenda “concluded that IPR infringements throughout China remained at unacceptable levels.”

But further safeguards are needed against Beijing’s counteroffensive. It must be remembered that China is unlike other trading states. The challenge it poses is not just economic, but strategic. It uses the gains from trade, technology transfers and investment to support a “rise” in global power applied against U.S. interests in every theater of international confrontation, on every continent.

The U.S. Treasury has been trying to convince Beijing to move its currency valuation toward a market-determined rate. Set by government fiat, the yuan is considered to be as much as 40 percent undervalued, giving Chinese firms another advantage both at home and abroad. But Beijing could allow a small appreciation to ward off critics without actually improving matters. Few of China’s top foreign-funded exporters are in price-sensitive industries. A stronger yuan would make China’s exports more expensive overseas but not reduce sales, while lowering the cost of its imports. This would help Chinese industry move up the value chain and increase profits. This is a common tactic states and firms use after driving foreign rivals out of business or forcing them to relocate to China. A currency reform that is not large enough to actually move in the direction of more balanced trade is a ruse, not a remedy.

On Monday, the official Xinhua news service quoted China’s vice commerce minister Wei Jianguo as saying increasing imports of advanced technology is one way to ease China’s trade surplus. This is a longstanding ploy by Beijing to use the trade imbalance as leverage to remove security restrictions on the transfer of technology with military applications. Li Ruogu, deputy governor of the People’s Bank of China, has argued the United States “should concentrate on sectors like aerospace and then sell those things to us and we would spend billions on this.” This issue has been raised at every U.S.-China summit meeting.

Wang Qinhua, head of the Mechanical, Electronic and Hi-Tech Industry Department told Xinhua the government will organize overseas procurement from the United States and Russia. Mr. Wang said integrated circuit manufacturing equipment, high-quality chemical fiber equipment and digitally controlled machines are also wanted. These would boost the competitiveness as well as the capacity of the defense industrial base, leading availability to Beinjing of greater economic wealth and power. It is not in the long-run U.S. security or economic interests to see this happen.

The first concern of U.S. trade policy must be continued American industrial pre-eminence, especially against geopolitical rivals.

William R. Hawkins is senior fellow for national security studies at the U.S. Business and Industry Council Educational Foundation.

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