INSIGHT: Another crisis looms for US-China trade

24 August 2006 16:21  [Source: ICIS news]

By Joe Kamalick

 

WASHINGTON (ICIS news)--The US-China relationship staggers toward yet another trade crisis as a deadline looms in the US Senate where sentiment for trade sanctions against the Middle Kingdom is growing as fast as China’s trade surplus.

 

Barely a month remains before the 30 September deadline set earlier this year by senators who are demanding that China revalue its currency, the yuan, by at least 10% or face a 27.5% punitive duty on all US imports from China.

 

That deadline will reach its midnight at the peak of the US midterm election campaign when senators and members of the House will be trying their best to look tough on trade and those foreign lands that don’t play fair. 

 

The deadline takes on even greater portent now in the wake of a new study by the Manufacturers Alliance showing that for the first time China has overtaken the US in the export of manufactured goods.

 

The alliance said in a special report by senior trade specialist Ernest Preeg that China’s manufactured exports worldwide totalled $404bn (€316bn) in the first half this year, well ahead of the $367bn in US exports of manufactured goods to the world marketplace.

 

Preeg termed the Chinese gain a “dramatic reversal,” noting that as recently as 2001, US manufactured exports were double those of China’s. He said China’s manufactured goods exports may soon be double the US volume.

 

“This dramatic reversal,” said Preeg, “together with the increasingly high-tech orientation of Chinese exports, poses a serious challenge to US export competitiveness and long-standing leadership in technological innovation.”

 

Preeg said the new trade figures may move Congress to act. “I don’t think people have recognised how serious this has become,” Preeg said, “but these numbers will definitely get their attention.”

 

The gain in China’s exports and the increasingly worrisome bilateral US-China trade imbalance are both attributed to China’s undervalued currency. Many in Congress and elsewhere contend that Beijing’s manipulation of its currency keeps the yuan roughly 50% below what otherwise would be its true value. That undervaluation of the yuan, said Preeg, acts as a 50% subsidy for Chinese exports and as a 50% tariff on Chinese imports from the US and elsewhere.

 

Earlier this year Senator Lindsey Graham (Republican-North Carolina) and Senator Charles Schumer (Democrat-New York) introduced a bill that would impose a 27.5% duty on all imports from China, but they told US treasury secretary Henry Paulson that they would hold off on the measure until 30 September. In the meantime, they wanted the Bush administration to get Beijing to move more aggressively to revalue the yuan.

 

China is showing no inclination whatever to revalue its currency by a sharp 10%. Chinese President Hu Jintao was careful to avoid any such commitment when he visited Washington and President George W Bush in April. He said China would keep to its more modest revaluation plan of about 3% annually.

 

By 30 September, every member of the House and one-third of senators will be in full-tilt re-election mode. Republicans especially are running hard, fearful that the unpopular war in Iraq, high gasoline prices and Bush’s generally low approval rating will cost them at the polls in November. Many Republicans and of course Democrats as well would welcome the chance to stand tall for free trade, the American worker and a level playing field by voting for a duty sanction against Chinese products.

 

The 27.5% duty bill might not pass; the House and Senate have a lot on their plates in the waning days of the 109th Congress, and a China-bashing bill might easily get shuffled aside. But if it should get passed by Congress, Bush would be hard pressed to veto the measure only weeks ahead of the election.

By: Joe Kamalick
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