Tuesday, February 13, 2007

On Sino-American relationship

Business Times - 13 Feb 2007
Will WTO's China case take the heat off Bush?
WTO action against China could help ease pressure to take a tougher approach against China
WHEN US Treasury Secretary Henry Paulson address-ed law-makers on the Bush Administration's global economic policies late last month, he couldn't fail to detect a growing scepticism over US policies towards China and rising demands in Congress for imposing punitive economic sanctions on Beijing in order to force officials there to change China's fixed exchange rates which that critics blame for soaring US trade deficits.
During a hearing at the Senate Banking Committee on Jan 31, both Democratic and Republican senators criticised the Bush administration for not designating China guilty of currency manipulation in its latest report on the global foreign exchange market.
Mr Paulson, who headed a delegation to China last December, responded by defending the Bush administration's policy of engaging China in discussions over economic policy, including the US goal of encouraging the Chinese to float freely its currency in the international foreign exchange markets, and insisted that Washington's efforts has produced 'some results'. He stressed that the meeting with the Chinese was 'not a scripted ceremony'.
But both Democratic and Republicans lawmakers made it clear that in their view, the administration's approach, called the Strategic Economic Dialogue, which includes twice-a-year discussions between the Americans and the Chinese - the next meeting is scheduled to take place in May in Washington - has failed to produce results in moving Beijing towards floating the yuan.
'The Congress is not going to wait and see how this is progressing when they watch three million manufacturing jobs leave this country,' Democratic Senator Christopher Dodd of Connecticut told Mr Paulson. 'You are going to get blown by if we don't get a better handle on this.'
Mr Dodd is one of the leaders of the new Democratic-controlled Senate and has announced that he was running for his party's nomination as presidential candidate. His tough talk on China echoes the populist mood that dominates Congress these days and which Democrats hope to exploit as part of their political and legislative challenge to President George W Bush.
That President Bush and his aides decided not to cite China as a currency manipulator in the report sent to Congress in December reflects their concern that such a move could have led to punitive sanctions against imports if the United States had won a case on the issue before the World Trade Organisation (WTO), and could have triggered a costly trade war with the Chinese.
Several of the Senators mentioned during the hearing a bill pushed last year by Senators Charles Schumer and Lindsey Graham that calls for imposing tariffs of 27.5 per cent on all Chinese imports coming into the US if China did not take steps to revalue its currency.
'We have been talking to the Chinese for five years and we're not getting enough results,' Mr Schumer, a major Democratic leader said in response to Mr Paulson's comments. 'The Chinese should know Congress is exasperated and will act on a strong bill this session.'
In a way, the decision by the Bush administration to file a trade case against China with the WTO in a dispute involving government subsidies two days after Mr Paulson's testimony on Capitol Hill, should be seen as a response by President Bush and economic aides to the political pressure from the Democratic-controlled Congress, demonstrated during the exchange with Mr Pauslon, to 'do something' about America's trade deficit with China.
Hence, while Mr Paulson had rejected the idea of designating China as a currency manipulator - a move that could have led to a major Sino-American battle at the WTO, he is hoping that a mini-battle with the Chinese over in the WTO that China was using government support and tax policies to bolster Chinese firms in competition against US and other foreign firms would help appease the populist Democrats and Republicans in Congress and discourage them from considering the imposition of sanctions against Beijing.
Not unlike the military 'surge' in Iraq that is aimed at buying political time for the Bush administration and make it difficult for the Democrats in Congress to sabotage the current policy there, the action against China at the WTO could help erode the political pressure on the White House to adopt a tougher approach against China.
The US complaint with the WTO will lead to negotiations of about two months between the Americans and the Chinese, and if they failed, a WTO hearing panel will be assembled to resolve the issue, a process that will take more time.
This is the fourth time that Washington has complained to the WTO about China's trade policies. The previous three related to China's auto parts import regulation, brown paper and semiconductor sectors.
In any case, as analysts have pointed out, while export subsidies are banned under WTO rules, they are hard to pin down, and the dispute triggered by the last US complaint could take a very long time to settle.
Moreover, it's not inconceivable that the Chinese would end up making some minor concessions on the issue. At the same time, the Americans and the Chinese will continue their economic dialogue in May in Washington which provides another opportunity for Mr Paulson to argue that some 'progress' was made in dealing with the issue of China's currency. The question is whether Congress would be willing to buy his argument.
Copyright © 2005 Singapore Press Holdings Ltd. All rights reserved.

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