Thursday, June 21, 2007

On Sino-American relationship

Business Times - 22 Jun 2007

US just hurts itself when it plays hardball with China


WHILE US officials were welcoming their Chinese guests in Washington on Wednesday to start talking about ways to strengthen ties between China and the United States, American lawmakers were pressing the Bush administration to increase pressure on Beijing in a way that was bound to increase tensions between these two powers.

US Deputy Secretary of State John Negroponte and China's Executive Vice-Foreign Minister Dai Bingguo are chairing the Sino-American talks in Washington, as part of a dialogue between officials from both countries aimed at managing their differences over such issues as Iran's nuclear programme, the violence in the Darfur region in Sudan and the resolution of the North Korean nuclear crisis. For anyone interested in continuing engagement between the world's only remaining superpower and its rising economic and military power, the dialogue in Washington is certainly a piece of good news.

But the push for engagement with China is colliding with the pressure coming from those in Washington who are seeking confrontation with Beijing. Many US lawmakers charge that the Chinese yuan is undervalued against the US dollar, making Chinese goods cheaper for American consumers while increasing the price the Chinese must pay for American products, and as a result leading to a continuing rise in the US trade deficit with China which hit a record US$232.6 billion in 2006.

In the latest effort to play diplomatic hardball with China, four leading US Senators - Democrats Charles Schumer and Max Baucus and Republicans Lindsey Graham and Charles Grassley - have proposed legislation that seemed to enjoy wide support in the Senate and would force the US administration to report on Chinese currency manipulations and make it likely that Washington would have to impose tariffs on Chinese imports.

The Bush administration, which wants Beijing to appreciate the value of its currency, is opposed to punitive measures like this and other Congressional bills aimed at penalising China for its currency policy. Reflecting its complex position on the issue, the Treasury Department refrained from citing China for manipulating the yuan in its latest report to Congress on foreign exchange. But the administration has pressed the International Monetary Fund (IMF) to issue new guidelines that call on its 185 member nations to refrain from embracing exchange rates that 'result in external instability'. It is doubtful that the IMF statement would have any direct impact on Chinese policies, but it could help in dealing with the issue in a multilateral and less politically charged environment.

Responding to the growing pressure on the Bush administration to talk tough with China, US Treasury Secretary Henry Paulson, who is one of the main proponents for engagement with China, insisted during Congressional testimony that the administration was continuing to engage the Chinese on economic policies, including the currency issue and warned lawmakers against using the tool of trade protectionism. 'As the world opens its doors, we must resist the sentiment that favours economic isolationism; this is not the time to retreat from the principles which have made America so strong and competitive,' MrPaulson said during his testimony before the House Committee on Financial Services. He also expressed his scepticism that revaluing the yuan would help fix the US trade deficit with China.

'While currency reform is not going to eliminate our trade deficit, a market-determined exchange rate that reflects the underlying fundamentals of the Chinese economy is an important ingredient to sustainable, balanced economic growth in China, which is critical to continued stable growth around the world,' Mr Paulson stressed. And he explained that continuing US economic growth fuelled by open global trade would help reduce the US current-account deficit. He assured the lawmakers that the administration would continue to press Beijing to move more quickly to let the yuan rise in value against the US dollar.

But while Mr Paulson and his Treasury Department have been stressing the need to reduce economic tensions with China, the US Commerce Department, under the leadership of Secretary Carlos Gutierrez, announced last week that it was tightening restrictions on exports of American technology to China. A new rule requires now that American exporters acquire administration approval before exporting technology to China that could help the Chinese to modernise their military.

American companies are concerned, however, that the new rule would not only increase tension with the Chinese but would also encourage the Chinese to purchase the technologies from other countries. This is just another example how punishing China on the economic front only ends up hurting US economic interests.

Copyright © 2005 Singapore Press Holdings Ltd. All rights reserved.

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