U.S.-China Trade

When: June 17 and 18

Where: US Naval Academy - Annapolis, MD

Who: Co-Chairs US Treasury Secretary Henry M. Paulson, Jr. and Vice Premier Wang Qishan

Why: To strengthen and deepen the bilateral economic relationship through actions to:

• raise questions
• seek consensus
• implement results
• prevent trade protectionism and conservatism from hampering the trade cooperation

What: An overview of China and the US coming to the table to discuss the following areas:

1. Macroeconomic Cooperation and Financial Services.  The countries pledge to work together toward sustained growth, stability in price and financial systems, and agreed to continue a collaborative approach to sharing information on issues of mutual interest.
2. Investment in people and Product Quality and Food Safety. Agreed the need to open up communication regardingt mitigating economic risks associated with aging populations in both countries, and to use this as a platform for investigating ways to provide better healthcare and retirement services. Bilateral efforts to continue activities determined at SED III for product safety on an ongoing basis.
3. Cooperation on Energy and the Environment. Mutual understanding of the importance of cooperating to address challenges. Both countries expressed the desire to strengthen commitments to energy and the environment.
4. Trade and Competitiveness. Challenges of trade were discussed, as well as actions that would support each nation’s economy within the larger picture of globalization.
5. Investment. China and US came to an agreement on a series of actions that will be taken to create a mutually beneficial investment path for and between both.

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.