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Trade showdown looms between the US and China

"We're probably headed for some heavy weather in US-China trade relations."

John Tkacik, US-based China expert

The US put China on notice last week that its patience is running out on a host of trade complaints.

With the EU also growing more exasperated with Asia's second-biggest economy, the scene would appear set for a showdown over trade unless Beijing has a change of heart.

The West has long complained that China's yuan currency is under-valued, giving an artificial boost to Chinese exports and fuelling a massive surplus in China's trade position.

But while the US and its EU partners are largely powerless to effect change on the foreign exchange front, they can take action on other bones of contention.

Action came during last week with both the US and EU launching consultations that could lead to restrictions being slapped on Chinese garment imports, which have gone into overdrive since global textile quotas were abolished on Jan. 1.

Then last Friday the US Trade Representative's (USTR) office, unveiling an annual report on protection of intellectual property rights, put China on a blacklist of 14 countries guilty of "rampant" copyright abuses.

Complaints of copyright piracy have been a mainstay of US trade policy for years with officials complaining that too little is being done to stop the manufacture of fake US goods in black-market Chinese factories.

But for the first time, the USTR gave an explicit warning that Washington could sue China at the WTO unless Beijing cracks down on the counterfeiters.

Analysts say that President George W. Bush's administration is growing more assertive towards China as the war on terrorism retreats in relative importance and older disputes in the bilateral relationship return to the fore.

In part, it is argued, the White House is acting under pressure from Congress, where many lawmakers say the world's most populous country has gained an unfair economic edge and needs to be reined in.

"We're probably headed for some heavy weather in US-China trade relations. And frankly, it's high time for the US to get tough with the Chinese," said John Tkacik, a Washington-based China expert at the conservation Heritage Foundation.

At US$162 billion, the US trade deficit with China was a quarter of the country's total trade shortfall last year.

Critics, both Democratic and Republican, say the cost of that deficit is being measured in American jobs. US textiles factories had 14,000 workers fewer in March compared to a year before.

China, the argument runs, has had a free rein for too long to dump as many goods as it likes on the US while refusing to open its own markets fully to US imports. Much the same grumbling was heard in the 1980s when Japan seemed set for global economic dominance.

China, however, as one of the biggest holders of US Treasury bonds is therefore is a major provider of the cash needed to sustain Americans' insatiable desire for imported goods.

Tkacik, however, said any talk of China throwing global financial markets into havoc by dumping Treasuries in retaliation for US action on the trade front was "bluff and bluster from the Chinese."

"It makes no sense to dump them as they'll just lose out massively themselves financially. And if they can't sell Treasury bonds, what else is there for them to do?" he said.

China has reacted furiously to the mounting trade pressure but has stopped short of spelling out any tit-for-tat action it might take.

Senior officials in Beijing have said that any efforts to restrict Chinese exports would be a violation of free trade, would smack of protectionism and violate the principles of the WTO.

China is not without its supporters in Washington. Clothes retailers and importers are up in arms over the pressure for curbs on Chinese textile shipments.

More broadly, the clamor for textile restrictions is being tolerated by an administration that says free trade is one of its most pressing priorities, with the WTO's "Doha round" of negotiations approaching its climax at the end of this year.

"Worst of all, this isn't the auto or semiconductor industry, fields where the United States and Europe can actually claim that economic stability is at stake. Our domestic textile sectors have been on the decline for years," commentator Clay Risen wrote in the influential liberal journal The New Republic.

"It's not the end of the world if Washington, Paris, and Brussels follow through on their threats to reinstate textile quotas. Just don't be surprised if the next time we make a push for free trade, the rest of the world decides not to play along," he said.
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