WorldCity Business Magazine

Two faces of China

by Jeffrey Sparshot

One side argues that open trade with China is necessary for U.S. corporations. The other side counters that U.S. companies are at a competitive disadvantage.

China is either proof positive that globalization works wonders, or the poster child for globalization’s ills.

One view notes that China has embraced globalization, reformed its economy and joined the World Trade Organization on its way to rising economic prosperity. Other countries trying to overcome decades of poverty should consider emulating the world’s most dynamic developing nation.

“Many aspects of China’s economic picture are impressive, even amazing. Already, China is the world’s fourth largest economy and third largest trading nation,” the Institute for International Economics and Center for Strategic and International Studies, two Washington think tanks, said in a new book." It has grown by about 10 percent a year for almost three decades, increasing its output by a factor of nine since launching its economic reforms in 1978. In the process it has lifted more than 200 million people out of poverty.”

Another view sees China and its rising tide of cheap exports as the cause of job losses, falling wages and de-industrialization in the United States, Europe and even some developing countries where local factories cannot compete with the price and quality of Chinese goods.

The latter opinion is ascendant in the U.S. Congress right now.

“There’s a growing impatience in Congress with China’s slowness in addressing key issues, such as currency reform and the enforcement of intellectual property rights. More and more, members are introducing legislation to deal with these and other issues,” Sen. Charles Grassley, an Iowa Republican and chairman of the committee with jurisdiction over trade issues, said earlier this year.

Last year’s record trade deficit with China, almost $202 billion, is the most obvious statistic pointing to a problematic and possibly unsustainable imbalance. Surges in imports of particular products, from cotton dresses to steel tubing to color televisions, have meant hefty layoffs on an industry-by-industry basis.

U.S. lawmakers have responded with an array of bills that would raise tariffs across the board, or at least make it easier for industries to throw up barriers against specific Chinese goods.

“The trade deficit between China and the United States is unhealthy,” said Sen. Lindsay Graham, a South Carolina Republican and co-sponsor of one of the most widely supported bills to crack down on China. It would raise tariffs on Chinese goods by 27.5 percent.

Graham and the bill’s Democratic cosponsor, New York Sen. Charles Schumer, have voluntarily delayed votes on their bill several times, officially to give China more time to raise the value its currency. A more expensive yuan would make Chinese goods more expensive and make U.S. exports to China cheaper. (It also would make it easier for China to buy U.S. assets like the aborted attempt by Chinese oil company CNOOC to buy Unocal or the successful bid by computer maker Lenovo to snap up IBM assets.)

The White House has long resisted such broad attacks against China, instead preferring cooperation on a broad range of economic and political fronts. But the Bush administration is not tone deaf especially in an election year to the anti-China song in Congress.

So the White House is talking tougher on currency and has promised to beef up trade law enforcement. In March it joined the European Union in filing a case at the WTO against China’s rules governing the import of auto parts. It is the second case against China the first, brought by the United States, was settled without a formal WTO ruling.

The administration also is preparing a case against China’s weak enforcement of intellectual property rights. Chinese companies are notorious for copying U.S. designs and brands including handbags, pharmaceuticals and computer software and selling them at home and abroad.

The cases are legitimate, and the administration’s resolve genuine. But the get-tough tactics also are meant to help forestall or at least soften some of the harshest measures proposed in Congress.

They are, however, unlikely to lower the trade deficit, leaving a lingering issue for Democrats in upcoming elections and a potential long-term problem for the U.S. economy.

“Broken promises by China and the administration have led us to a dangerous place in our trade relationship,” said Sen. Max Baucus, a Montana Democrat who is usually viewed as a moderate voice on international issues.

“It is no wonder that Americans do not trust China on trade, when it does not keep key commitments. It is no wonder that Americans do not trust the administration on trade policy, when the administration refuses to use U.S. law to defend Americans. We need to get this relationship back on track,” he said.

It’s a theme sure to be repeated often before November.