U.S.-China Trade

FPA sent me a link to an article opposing the theory that the trade imbalance between China and other major players can be resolved by a stronger Yuan. David D. Hale and Lyric Hughes Hale frame the problem as one larger than the imbalance between China’s exports and the weakening US economy: “The greater and far more critical challenge is to properly complete China’s integration into the global economy.”

Instead, they suggest taxation reform, restructuring of corporate/banking sectors, gradually opening capital accounts, and helping along domestic consumer spending. This idea puts a positive spin on the trade deficit by focusing on additive measures, rather than those working to negate current economic circumstances. The point here that I find most compelling is their refusal to deny the pros that have resulted from China’s trade surplus. . . US companies outsourcing production costs to China have been exceedingly profitable, and those dollars the People’s Bank of China buys up is helping to soften the blow of an indebted US economy. And let us not forget that the televisions and clothes assembled and manufactured in China are much more attractive to the average consumer.

All this reminds us of the progress that has been made thus far, economically, and in state relations. Granted, there is still much work to be done, but leveraging current platforms for coordination such as the Strategic Economic Dialogue series is an encouraging way to approach resolution. A renewed sense of optimism goes a long way.

The Yuan is still up while the USD continues to lower in value.  What does this mean for China? According to this article, huge losses (Billions) for the People’s Bank of China. China’s surplus situation is forcing the country to sell its RMB to buy dollar assets, and then turn around to buy back its RMB through sales of local currency bonds. The rising Yuan against the USD translates to losses in interest on new and accumulated reserves.

The USD falls not only in comparison to the Yuan, but also against the Euro and Yen. This in a landscape where China is positioned to trade with any of the numerous countries knocking on its door. A weak US economy may slow China’s export market, but will not affect its overall demand.

Amidst all this, US Congress is knocking on Beijing’s door with threats of retaliatory action if it does not enable the RMB to rise on the dollar. It seems there is little action the US can take to work proactively toward strengthening its economy while China looms large.  Hamid Faruqee for the IMF Research Department prescribes adjustment in the following areas:

• In China, a faster rate of renminbi appreciation would allow for more broad-based exchange rate adjustment and would create much needed space for monetary policy tightening to keep inflation pressures at bay. In addition, advancing fiscal plans to support domestic consumption would help rebalance demand and support the global economy in the event of a sharper slowdown.
• In Saudi Arabia, rising inflation pressures suggests maintaining spending priorities in key areas such as infrastructure to help relieve supply bottlenecks.
• In the euro area, large losses suffered by European banks stemming from the U.S. subprime crisis draw attention on the need not only to deepen integration but also to strengthen financial stability arrangements. Effective product market reforms are needed to improve the business climate and sustain growth. Also, labor market reforms (including improving mobility) are needed to boost productivity and labor utilization.
• In Japan, with limited policy space to address a possible economic slowdown, structural reform measures remain central to enhance growth prospects and strengthen domestic demand, with priorities on enhancing labor flexibility and participation and to boost productivity through deregulation.
• And finally, in the United States, a slowdown in activity is challenging the steady progress made in reducing the federal deficit. But longer-term pressures on public finances from aging and entitlements underscore the importance of adhering to the authorities’ medium-term fiscal consolidation objectives. Thus, while timely fiscal stimulus is justified by the cyclical situation, it should be kept strictly temporary and targeted, to effectively insure against a deeper downturn without jeopardizing medium-term budgetary goals.

We’ve all read that Beijing is bringing its A-game for the upcoming Olympic games. As a major milestone and once-in-a-lifetime opportunity to show face as a key international player, the country is busying itself with strategic preparations to deliver an effective and meaningful sale this summer.The number 8, when pronounced in Mandarin (ba), rhymes with the pronunciation of the word for fortune (fa), which makes it particularly auspicious and dear to the Chinese. It is no coincidence that the date of the opening ceremony is set for 08-08-08, or good fortune x 3 when loosely translated into English.

It is this very east-meets-west sensibility that is coming into play as Beijing finds ways to present its life/country/culture so that when interpreted by Western eyes and ears, is met with a warm - and even pleasantly surprised - response. Ironically, China is looking abroad for ideas and techniques to ensure their tourists are met with comfort and luxury. On the agenda:

1. Address investigations that China is the biggest importer of steroids consumed by the US since its crackdown on Mexico (a hot and timely topic recently propelled by Mitchell, Olympic veterans Jackie Joyner-Kersee and Marion Jones, Sly Stallone, the list goes on.)
2. Ensure sufficient accommodations (renovate, build, grow!) for its visitors
3. Train chefs to create palatable options for tourists
4. Research tools to control environmental precipitation for opening night
5. Regulate factors impacting air pollution, such as vehicle production and traffic
6. Perform wide-spread education campaigns for the local Chinese, to make the city more welcoming and palatable (spitting etiquette, Chinglish clean-up)
7. Aggressively employ Western-style branding* with the games and all of its products [Enter: Friendlies mascots Bei Bei, Jing Jing, Huan Huan, Yin Yin, and Ni Ni, or Beijing Huan Yin Ni = Beijing Welcomes You]
8. Mass advertise to the world using the techniques, drama, and theatrics familiar to American entertainment and media.  What is more telling of China’s spirit, unity, and omnipresence than this Adidas commercial?

* Coca-Cola, Hewlett-Packard, Mattel, Motorola, Foxconn, Nike, Novozymes, Bayer, Genencor, APCO, Shell are examples of global brands participating in this event

[Christoper Padilla by Al Diaz for the Miami Herald]

In 2000, under the direction of the Clinton Administration, the US found itself at a critical juncture for decision: further integrate China into the global economy, or throw away decades spent building a trusting relationship?

Now, with the deepening bilateral trade deficit, the US finds itself at a similarly critical junction in 2008, under the Bush Administration. January 30, 2008, Under Secretary of Commerce for International Trade Christopher Padilla spoke in DC on “Economic Engagement with a Rising China.” Padilla relayed that moving forward, the US will continue to carefully monitor engage China:

 “Here in the United States, support for engagement does not mean blindness to the enormous challenges resulting from China’s economic rise. Just as the world watches closely when the United States holds an election or the Federal Reserve makes decisions about interest rates, it is appropriate for Americans to watch the hints that China is backing away from open trade and economic policies.”

To summarize the challenges the US faces in maintaining its economic relationship with China:

1. Neutralizing the effects of Chinese policies favoring Chinese national firms over foreign firms, an example being the “Anti-Monopoly Law.”
   
2. China’s (lack of) regulatory structure, from which piracy, counterfeiting, and the production of unsafe products are growing; the effects of which, Padilla has personally felt: “My own dog had been eating some of the pet food contaminated with melamine from China.”
   
3. Economic imbalances, such as China’s capital accumulation, which hinder trade relationships with other countries.

The US’ three-pronged economic strategy (“dialogue with intelligent use of leverage”) to engage China:

1. Continue to use the JCCT and SED as vehicles for bi- and multi-lateral dialogues. Upping-the-ante by reigning in trade allies Japan and the EU will not only put some teeth behind Washington’s words, but ensure that its efforts are not being undercut by backhand third-party trade deals.
   
2. Leverage the WTO’s dispute settlement system. Outsourcing the gritty details of how issues such as the protection of intellectual property rights, discriminatory taxation systems, and market access are resolved will really allow us to focus on further engaging China positively.
   
3.  Rigidly enforce US trade remedies, in response to issues such as dumping and government subsidies.

Striking a balance between preemptively employing punitive measures to isolate China and risk trade retaliation, and failing to stand its ground on progress that has been made, the US’ strategy is to avoid “pushing China in the wrong direction” by pulling it in the right one.