Foreign Correspondence

[Amaunet]

The US-China trade 'disconnect'
By Russell Smith and Caroline Cooper

Apr 26, 2006

NEW YORK - Two important developments in US-China trade relations took place simultaneously on one day this month. The day, April 18, started with the arrival of Chinese President Hu Jintao in Washington state to begin his first official visit to the United States. Hu's visit was intended to deepen US-China economic relations amid rising protectionism in the US Congress and to assert China's rising global influence.

In Washington, DC, the day also saw a changing of the guard on trade policy and possibly of the Bush administration's approach to China policy. President George W Bush announced that he was nominating current US Trade Representative (USTR) Rob Portman to head the Office of Management and Budget (OMB). The current Deputy USTR Susan Schwab will replace Portman.

Portman's departure, though not surprising given the current White House shakeup, comes at a critical time as the Doha Development Agenda (DDA) negotiations hang in the balance.

Many trade hands in Washington are saying that shifting Portman, a highly regarded "rising star" in the Bush administration, from the trade portfolio to the OMB sends a strong signal that the White House no longer places trade high on its policy agenda, and in particular that there is little hope for a substantively successful outcome in the DDA negotiations.

With regard to China, the emerging view seems to be that Portman's transfer may reopen the door for Deputy Secretary of State Robert Zoellick to play a more critical role in overall coordination of China policy. That, analysts say, would mean that the Bush administration's China-trade agenda will shift away from the goal of using the talks to integrate China further into the world trading system and deepening bilateral trade relations with China to that of responding to domestic pressures by increasing enforcement against China's alleged unfair trade practices.

The notion that the US line on China trade was hardening may have been further confirmed by Schwab's comments thanking Bush for the USTR nomination. She made no specific mention of China but noted that "holding our trading partners accountable through enforcement of existing trade laws and agreements will continue to be a critical component of our trade agenda".

So, on one single day, on one US coast, the president of China was claiming to see closer ties to the United States, promising more responsiveness on trade issues, and describing the extensive economic relationship between the two countries in favorable terms. On the other coast, many feel the president of the US was signaling a shift in attitudes that could put additional tension on that relationship. What are trade watchers to make of these parallel events?

Clearly, despite years of effort by administrations from both main US political parties, the country still is unable to define either the goals or the direction of its trade relationship with China. This is also true on the strategic level, but in the context of trade, the "disconnect" seems to be even more pronounced. The United States and China are speaking to each other about trade on a continuous basis, but it is difficult to conclude that one side is hearing or understanding what the other is saying.

An analysis of the events leading up to President Hu's meeting with President Bush make clear that both governments are approaching bilateral relations with very different objectives in mind: China recognizes the need for reform, but on a limited basis and at its own pace. The Bush administration, faced with little progress to date and substantial pressure from US business and a bipartisan Congress to "do something about China", wants dramatic reform, on a defined timetable, "or else", with the "or else" as yet undefined in any real manner.

Whether either side can find a path that accommodates the needs of the other is critical to the future state of bilateral trade relations and could result in improvement or a real and very adverse deterioration in the overall US-China relationship.

US demands
The US and Chinese governments viewed President Hu's trip to the United States in different ways for different purposes. For China, Hu's trip represented a unique public relations opportunity both to deepen bilateral trade relations and to underscore China's rising influence on the world stage. Accordingly, the Chinese government regarded the trip as an official state visit, expecting all the usual fanfare, including a formal state dinner.

The US administration, on the other hand, saw Hu's trip as a privilege Bush was extending to a leader seeking respect on the world stage, a platform from which to assert the role of Bush as leader of the only global superpower and an opportunity for Bush personally to increase pressure on China to live up to its trade obligations. As if to underscore this perspective, US officials rebuffed China's request for a formal state visit, arranging only for a short meeting between the leaders and a formal luncheon. Desiring a successful visit, the Chinese government acquiesced to US wishes on the formalities of the visit.

The US trade agenda for the talks consisted of one primary goal: "recalibrating" the bilateral trade relationship. Assistant USTR for China Tim Stratford best described this notion at a recent hearing in which he said, "While our bilateral trade relationship has been largely beneficial for both the United States and China, it is not sufficiently balanced in the opportunities it provides." He explained, "There is concern that the US-China trade relationship lacks balance in opportunity as well as equity and durability."

To seek more balance, Bush administration officials sought assurances from China that significant efforts would be made to address the top three US trade concerns at the US-China Joint Commission on Commerce and Trade (JCCT) meetings on April 11. They include the worsening aggregate US trade deficit, China's undervalued currency, and China's weak record on the protection of intellectual property rights (IPR). Early last month, Commerce Secretary Carlos Gutierrez went so far as to threaten cancellation of the JCCT meetings unless the Chinese government was willing to address these concerns, specifically protection for DVDs (digital video discs) and software.

Members of the US Congress from both parties joined the administration in pressuring China to address key concerns, specifically the need to revalue the yuan. Senators Lindsey Graham and Charles Schumer, sponsors of S297, a bill to apply a 27.5% across-the-board tariff on Chinese imports unless the yuan was revalued, visited China last month to impress upon Chinese leaders the political and economic importance of revaluation.

In a surprise turn of events, the senators came away from the trip with what Schumer described as "a real feeling that the Chinese realized that pegging their currency is not only bad for America, but bad for China as well". Consequently, both senators decided to delay consideration of their legislation to not later than September 29, but with one caveat - they would seek earlier consideration if there are no indications that China is moving ahead with currency reform before that date.

Another reason that Graham and Schumer delayed consideration of their legislation was the introduction of another bill, S2467, by Senate Finance Committee chairman Charles Grassley and ranking Democrat Max Baucus. The Grassley-Baucus bill, which was introduced on the same day Schumer and Graham decided to delay consideration of theirs, represents a departure from the constant threats of action and negative rhetoric from lawmakers about China's undervalued currency, which have yielded so few results.

The bill reflects serious concern on the part of both Grassley and Baucus about the direction of US-China trade relations, and offers solutions to key problems that could yield significant support from senators. For example, S2467 contains language to repeal the 1988 Exchange Rates and International Economic Policy Coordination Act and provides a new mechanism to address misaligned currencies that adversely affect the US economy. Specifically, the bill requires that the United States enter negotiations with any country deemed to have a misaligned currency and, if necessary, impose some form of economic sanction if such negotiations fail to produce a positive result.

China's response
The Chinese government responded to US demands by making commitments to move forward on four major issues at the JCCT meetings. In doing so, the Chinese government hoped to mitigate harsh rhetoric from the US Congress and pave the way for a successful visit by President Hu. First, Chinese officials agreed to increase market access for US exporters by beginning the administrative process that could lead to rescinding the ban on US beef, adjusting equity capitalization requirements in the telecommunications sector, and removing barriers to trade in medical devices.

Second, the Chinese government agreed to improve transparency by joining the World Trade Organization's Government Procurement Agreement and requiring all levels of government to publish trade measures in one journal.

Third, the government agreed to address IPR concerns by requiring the pre-loading of legal operating system software on all computers produced or imported into China, ensuring the use of legal software in government and enterprises, pursuing IPR cases raised by the US government and initiating a new action plan to improve IPR enforcement.

Finally, in an effort to redress the bilateral trade imbalance, a business delegation accompanying Chinese officials signed purchase contracts with companies such as Boeing and Microsoft worth $16.2 billion. No commitments were made regarding foreign exchange.

Many US opinion leaders and decision makers expressed the view that the JCCT commitments were not as definitive or extensive as the United States would have liked. Senator Grassley reflected this view: "It looks like there were some positive developments at this year's meeting. But lofty statements coming from a meeting don't mean a thing if there isn't follow-through. So the question now is, how long will it actually take to achieve the good objectives, including reopening the Chinese market to US beef? I'll be keeping a very close eye on what happens in the weeks and months ahead."

Outlook
With the mid-term congressional elections fast approaching in the United States, Bush must demonstrate visibly to the public that he will not be satisfied with half-measures on the Chinese currency, IPR and overall trade imbalance issues. Therefore, the Treasury Department can be expected to move a step closer, if not all the way, to citing China as a currency manipulator in its forthcoming report due at the end of this month.

The Bush administration will also give more consideration to bringing a World Trade Organization case against China for failing to show evidence of efforts to enforce IPR laws, specifically as they relate to criminal activities. These efforts may well stave off potential action by the current Congress on pending China-related legislation. But they will not be enough, especially if the Democratic Party is able to take control of either the House of Representatives or the Senate when the new Congress convenes next January.

In their joint remarks after their April 20 meeting, Bush and Hu were cordial, and showed little obvious disagreement or tension on trade, with Hu acknowledging the legitimacy of US complaints about the yuan and IPR enforcement and Bush agreeing that these problems needed to be addressed. This was to be expected - given the investment both leaders had in having their first summit be seen as successful.

Although Hu agreed to continue working to address US concerns, it is unlikely that in the absence of additional concrete actions this kind of general statement is enough to placate the factions in the US who are hyper-critical of China. The lack of positive, definitive forward movement in the relationship means that the direction of trade relations remains undefined and therefore at risk of serious confrontation unless such movement takes place in the not too distant future.

In short, the United States and China need to end the "disconnect" and start some substantive and productive communicating as soon as possible.

Russell Smith and Caroline Cooper are with Willkie Farr & Gallagher LLP.

(Posted with permission from KWR International, Inc, (KWR), a consulting firm specializing in the delivery of research, communications and advisory services


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