May 17, 2007

Battle Lines Draw In Trade Blame Game?

Next week the USA hosts China in the second "Strategic Economic Dialogue" conference. At issue, apart from a myriad mix of petty trade wars, is the big looming protectionist wave gathering in Congress that is pushed forward by the beleaguared American auto industry and labor union pressure groups. Nothing less than USA-China trade and foreign relations and the fate of the world's economy hangs in the balance. In advance, battle lines are drawn in America's oh-so-relevant op-ed pages.

China's advance is led by Vice Premier (Prime Minister) Wu Yi, ranked by Forbes in 2005 as the second most powerful woman in the world. Madame Wu will led the contingent next week and the (never free) Wall Street Journal gave her column space in today's paper. Herewith, Wu Yi's statement, presented in the spirit of Fair Use:

It's Win-Win on U.S.-China

By WU YIMay 17, 2007; Page

No two countries enjoy such complex business and trade
ties as China and the United States. Both countries are closely linked and interdependent, but relations are also marked by frictions and disputes. Thirty-five years ago, China-U.S. trade volume was almost nonexistent when a breakthrough was made in our icy bilateral relations. By 2006, we had become the other's second largest trade partner, with both economies inextricably entwined.

Mutual benefit and win-win progress: These are what China-U.S. business and trade relations are all about, and these intrinsic
qualities have made our trade ties strong and vibrant. A recent report, "China: The Balance Sheet," jointly published by two major American think tanks -- the Center for Strategic and International Studies and the Institute for International Economics -- noted that China brings incontrovertible economic benefits to the U.S. The rapid growth of the Chinese market boosts U.S. exports; China's exports to the U.S. and its investments in American financial assets help restrain U.S. inflation and interest rates, and thus permit faster economic growth and more job creation.

The win-win nature of this relationship is amply demonstrated by the rapid growth of bilateral trade. According to our statistics, bilateral trade has increased 106 times from the beginning of diplomatic relations in 1979 to 2006, registering an annual growth of 18.9%. U.S. statistics show a 144-fold increase, or 20.2% annual growth. Since joining the World Trade Organization, China has become America's fourth-largest export market, not to mention its fastest-growing. Over the same period, the growth rate of U.S. exports to China was 3.7 times that of U.S. exports to other countries.

Mutually beneficial business and trade relations also mean good returns on investment made by our companies. Between 1979, when the policy of reform and opening up was adopted in China, and the end of this March, 52,887 American investment projects were undertaken in China, with paid-in investment reaching $54.7 billion. China is now one of the major sources of overseas profits for American companies. American companies have steadily expanded market share in China through investment, with sales in China exceeding $75 billion in 2004. A survey conducted by the American Chamber of Commerce in China shows that in 2005, sales of American companies in China reached $61.1 billion, and $47.6 billion of American products made in China were exported. The total trade figure exceeded $100 billion.

Our business and trade relations also increase the well-being of our peoples, create many jobs and give consumers more choices in both countries. Morgan Stanley estimates that four to eight million American jobs are closely associated with trade with China, many of which are created through the sale of Chinese products by U.S. retailers. Over the years, good quality yet inexpensive Chinese goods have both met U.S. demand and saved money for American consumers. Chinese exports have saved American consumers $600 billion over the past decade and nearly $100 billion alone in 2004.

Our business and trade relations have also contributed to the growth and transition of our respective economies. Labor-intensive Chinese
exports have enabled the U. S. to focus on developing capital and advanced technology-intensive products. A report issued by the U.S.-China Business Council in early 2006 shows that the expansion of trade with and investment in China has caused U.S. manufacturing employment to drop, but helped create more financial, redistribution and service sectors. U.S. employment data also shows that although the U.S. lost three million manufacturing jobs between 1996 and
2005, the service sector created 15 million new jobs over the same

China-U.S. business and trade relations are cooperative in nature. It is true that problems, differences and even disputes have arisen in the course of the rapid expansion of our relationship. But mutual benefit and win-win progress remain the defining feature of our business and trade ties. This is the larger picture that no problem can overshadow. As to differences and disputes, it is important that China and the U. S., both being stakeholders and constructive partners, should address them in a coolheaded, objective and responsible way.

Economic globalization is the trend of our times. China and the U.S., having both benefited from economic globalization, need to rise to its
challenges. We both need to make necessary economic adjustments, adopt sound and reasonable economic and trade policies, and seize the opportunities created by globalization to promote economic development and make life better for our peoples. However, there are some in the U.S. who overstate the U.S. trade imbalance with China, and blame China for problems that arise as the U.S. adjusts its economic structure to respond to challenges posed by economic
globalization. Some even advocate trade protectionism. Such irresponsible acts can only obstruct economic globalization and hinder the fundamental interests of both China and the U.S., our peoples and the sustainable and steady growth of the world economy. China and the U.S. need to, based on our respective national
conditions, properly address issues arising in the course of our respective economic adjustment, and resolve bilateral economic and trade issues through enhanced dialogue and consultation, and in a reasonable manner. Attempts to politicize trade issues should be resisted.

As we know, trade deficits are caused by a number of factors associated with economic globalization such as savings and investment correlations, the international division of labor and investment relocation. The U.S. trade deficit with China in goods is also a reflection of these macroeconomic factors. It does not reflect the overall and genuine movement of interests in China-U.S. business and trade relations. China does not seek a trade surplus. In the five-year development plan for 2006 through 2010, the Chinese government explicitly set a basic goal of sustaining economic growth and
promoting balance in international payment and macroeconomic stability by expanding domestic demand and particularly, consumption demand. We have taken steps including expanding market access, enhancing intellectual property protection and increasing imports to promote balance in trade. The U.S., as a
global leader in science and technology, should give full play to its
comparative advantage, enhance mutual trust and relax export controls to boost the competitiveness of American companies, reverse the trend of dwindling market share of American high-tech products in China, and reduce its trade deficit with China.

Since September 2006, the China-U.S. Strategic Economic
Dialogue, which was jointly initiated by our two presidents, has become an important channel for the two countries to discuss economic issues concerning our overall strategic and long-term interests and address, as appropriate, hotspot issues in our economic relations. The second China-U.S. Strategic Economic Dialogue will be held in Washington next week, and will focus on issues of mutual interest, including services, investment, energy, environment and
innovation. This forum is an important platform for growing China-U.S. business and trade relations and the promotion of the sound and steady growth of constructive and cooperative China-U.S. relations. It is of great significance to enhancing the strategic mutual trust between China and the U.S.

History has shown that the stable growth of China-U.S. business and trade relations serve the fundamental and long-term interests of
both countries. China and the U.S. need to increase mutual understanding and trust, overcome the interference of noneconomic factors, and resolve the problems in our business and trade relations in an active and pragmatic way so as to ensure the steady growth of our business and trade ties. I remain confident that as long as we continue to maintain an open dialogue and cooperation in accordance with the principle of consultation on an equal footing and for our mutual benefit, China-U.S. business and trade relations will have an even brighter future and bring greater benefits to our two peoples.

Washington Post columnist Robert Samuelson presents the American case:

China is not like the United States
By Robert

It sometimes seems that almost everything we buy comes
from China: DVD players, computers, shoes, toys, socks.

This is, of course, a myth. In 2006, imports from China
totaled $288 billion, about 16 percent of all U.S. imports and equal to only 2 percent of America's $13.2 trillion economic output (gross domestic product).

Does that mean we don't have a trade problem with China?

Not exactly.

China is already the world's third-largest trading nation
and seems destined to become the largest.

On its present course, it threatens to wreck the entire post-World War II trading system. Constructed largely by the United States, that
system has flourished because its benefits are widely shared. Since 1950, global trade has expanded by a factor of 25.

By contrast, China's trade is mercantilist: It's designed to benefit China even if it harms its trading partners.

There's a huge gap in philosophy. By accident or design, China has embraced export-led economic growth.

The centerpiece is a wildly undervalued exchange rate. Economist Morris Goldstein of the Peterson Institute thinks the renminbi is 40
percent cheaper than it should be.

The resulting competitive advantage props up exports, production and jobs. Since 2001, China's surplus on its current account -- the broadest measure of its trade flows -- has jumped from $17 billion to $239
billion. As a share of GDP, it's zoomed from 1.3 percent to 9.1 percent.

These figures include both Chinese firms and multinational companies doing business in China. Despite popular impressions, China's
trade offensive hasn't yet seriously harmed most other economies.

For example, America's current account deficit (to which Chinese imports contribute) was $857 billion last year, up from $389
billion in 2001. Still, that hasn't stymied job creation; the U.S. unemployment rate is 4.5 percent. And world economic growth has accelerated.

But what's been true in the past may not be true in the future.

The huge U.S. trade deficits, fed by Americans' ravenous appetite for consumer goods and heavy borrowing against rising home values,
stimulated economies elsewhere, including China's. Now that stimulus is fading, as U.S. home prices weaken and consumers grow more cautious. For China to expand production, demand must come from its own consumers, other nations -- or some other country's production must be displaced. There's the rub.

Even Chinese officials favor higher local demand. But either they can't or won't stimulate it. Personal consumption spending is a meager 38 percent of GDP; that's half the U.S. rate of 70 percent.

The Chinese save at astonishingly high levels partly because they're scared of emergencies. The social safety net is skimpy.

Health insurance is modest: out-of-pocket spending covers half of medical costs, reports economist Nicholas Lardy of the Peterson
Institute. There's no universal Social Security, and only 17 percent of workers have pensions. A mere 14 percent are covered by unemployment insurance.

The surplus of personal savings, supplemented by business
savings and foreign capital, means that Chinese and multinational firms can build more factories -- and that raises the need to export.
A low currency thus serves two roles: as an inducement to attract foreign investment, and as a tool to balance the economy and to check popular discontent.

But for the rest of the world, the consequences are potentially threatening. As China moves up the technology chain, it may become
the low-cost export platform for more and more industries. This could divert production from the rest of Asia, Europe, Latin America and the United States.

It is not "protectionist" (I am a longstanding free trader) to complain
about policies that are predatory; China's are just that. The logic of free trade is that comparative advantage ultimately benefits everyone. Countries specialize in what they do best.

Production and living standards rise.

But the logic does not allow for one country's trade systematically to depress its trading partners' production and employment. Down
that path lie resentment and political backlash.

Everyone complains about America's trade deficits, but they actually symbolize global leadership. Access to the U.S. market has promoted trade by enabling other countries to export.

But the deficits cannot grow indefinitely.

Imagine now a trading system whose largest member seems intent on accumulating permanently large surpluses.

Nor, it might be added, are surpluses ultimately in China's interests.
They drain too much of its production from its citizens and contribute to growing domestic economic inequality.

What everyone needs is more balanced Chinese economic growth, less dependent on exports. Given the immense stakes -- literally the future of the global trading system -- the Bush administration has been too
timid in pushing China to change. The Treasury Department won't even declare China guilty of currency manipulation.

No doubt doing so would irritate the Chinese.

But avoidance is no solution. The longer these problems fester, the more intractable and destructive they will become.

What is readily apparent is that one side is accentuating the positive, another negative. And Sameuelson's arguments (and the Blame China line generally) are widely discredited and lampooned for their stupidity.

Let's hope some level heads prevail next week!

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