Two years ago, US Treasury Secretary Henry Paulson Jr left Goldman Sachs and joined the Bush administration, hoping to use his expertise and contacts to ease economic tensions with China. His other goal was to stop Congress from passing legislation that might make tensions worse.
Today the administration has won only limited concessions from China. But it is also breathing a bit easier about possible retaliation by Congress.
Legislation aimed at punishing China over its currency practices, which have kept the price of Chinese exports artificially low, seemed to have momentum earlier this year. But in the waning weeks of Congress, lawmakers and their aides say its prospects are doubtful.
Paulson, meanwhile, will be leading a delegation of Cabinet members to meet with their Chinese counterparts in Annapolis, Maryland, next week, at what will be the fourth semi-annual round of high-level economic talks under the “strategic economic dialogue” started in 2006.
Administration officials say that while several specific trade issues have been resolved in the last two years, they are increasingly concerned that China is backtracking by using regulations, standards and other means to favor Chinese industry and shut out foreign competition.
The Chinese have their own list of complaints, producing a discordant atmosphere for the talks. In a scathing critique of US policies, for example, the Chinese envoy to the WTO charged in Geneva on Monday that the US let the dollar depreciate against other currencies, choking the global economy with high oil and food prices.
The dollar’s decline, said Sun Zhenyu (孫振宇), the Chinese envoy, had also shrunk the value of reserves held by China and other countries. He charged that the Bush administration had engaged in continuous abuse of the world trading system by imposing duties on Chinese goods, maintaining high tariffs and subsidies on many US products and restricting the export of high technology to China.
Paulson said on Tuesday that he would press in Annapolis for a more open Chinese economy and convey “the concerns of American companies that China’s investment regulations are opaque and seem in many ways to be designed to favor China’s ‘national champions.’”
Overall, Paulson insisted, speaking at the Carnegie Endowment for International Peace, the US-China relationship was “growing in a positive direction.”
Lawmakers in Congress may not share that view, but several factors appear to have taken the steam out of their willingness to act.
First, the devastating Sichuan earthquake and the global efforts to help its victims make this an inappropriate time in the eyes of some to be punishing China over its trade practices.
Second, although congressional ire remains focused on China’s intervention in the currency markets, the yuan has appreciated nearly 20 percent since mid-2005.
As a result, the growth of exports to China is outstripping the growth of imports from China, and the China-US trade deficit is heading slightly downward from its record level of US$256 billion last year.
There is also a stubborn dispute in Congress between the approaches of two competing bills, one passed by the Senate Finance Committee and the other by the Senate Banking Committee, to punish China if it does not do more to let its currency rise in value.
Attempts are being made to resolve the differences, but the prospects are doubtful because Congress is caught up in a heavy load of other business and election concerns.
During the height of the Democratic presidential primaries, the candidates expressed much skepticism toward free trade in general. But now business leaders opposing trade sanctions say they are pleasantly surprised that an anti-China measure may not materialize.
“We’re seeing a greater appreciation that exchange rates are complicated things,” said John Frisbie, the president of the US-China Business Council. “There’s also a growing recognition that China is now our third-largest export market and that punitive measures to get China to move probably aren’t going to get you to whatever the goal is.”
Frisbie said the business community would support a continuation of the dialogue in a new administration next year.
Paulson and other administration officials say the purpose of the “strategic economic dialogue” is not to solve nettlesome trade issues but to engage in broad dialogue about big topics. Next week, the topic is energy and the environment.
China and the US are the two largest importers of oil and largest purchasers of cars. China is also the world’s biggest consumer and producer of coal, and pollution from its coal-fired industries is believed to be a major factor in global warming.
But US officials say they do not expect breakthroughs beyond pledges of greater cooperation. And even in the environment and energy arena, trade disputes are aggravating tensions.
The US complains that China imposes steep tariffs on US technology that could be used to clean its air and water and improve energy efficiency. Paulson said on Tuesday that many US firms would not sell sophisticated products to China, fearing that the Chinese would steal their technology and copy them.
The sore points run the spectrum. Wall Street complains that China is not letting US banks, insurance companies and other institutions offer financial services, including credit cards. Barriers to direct investment in China remain formidable, US businesses say.
The new buzzword used by critics of China is “industrial policy.” Even the WTO used the term in a report last month to describe China’s use of government regulations and standards to foster domestic industries.
Commenting on the organization’s report last month, Peter Allgeier, the US envoy to the WTO, said China’s determination to be self-sufficient in critical areas was at “the root of many of the problems” between the Chinese leadership and its trading partners.
The actions have included the imposition of tariffs on steel, paper and other goods by the Commerce Department, and suits filed at the WTO. The Chinese also complained about bills under consideration in Congress.
Many experts say that China is unlikely to make any major concessions on trade in the remaining months of the Bush administration, and that its leadership may prefer to try to improve the atmosphere for a new incoming president, Democratic or Republican.
Some also say the US has lost a bit of leverage in its preaching to the Chinese about the benefits of liberalizing its economy in light of the credit and housing crises that administration and Federal Reserve officials say resulted from a lax regulatory environment at home.
“We’re certainly getting scrutinized by the Chinese over the way we’ve handled our markets,” said Myron Brilliant, vice president for East Asia at the US Chamber of Commerce. “The Chinese are saying: ‘Why should we completely open our economy and subject ourselves to these challenges?’ It’s made our case more difficult.”
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