INSIGHT: US-China deal will boost US exports

06 December 2007 17:29  [Source: ICIS news]

By Joe Kamalick

 

WASHINGTON (ICIS news)--The new Bush administration trade settlement with China could pave the way for considerable increases in US exports of chemicals, plastics and a broad array of other manufactured goods not only to the Middle Kingdom but worldwide.

 

The new agreement, in which China has agreed to end subsidies to domestic producers and some tariffs on imports, also may have the effect of cooling passions in Congress where many legislators have been threatening to “get tough with China” over trade and currency issues.

 

In the settlement worked out with Beijing by the US Trade Representative, Ambassador Susan Schwab, China is to end by 1 January two sorts of subsidies that disadvantaged US exporters to China and in third-country markets.

 

It should be noted that China agreed to end the subsidies not out of any noble sense of fair play but because the US filed a formal complaint against Beijing over the matter early this year before the World Trade Organization (WTO) and looked certain to win.

 

That said, the Chinese government has agreed to play nice - at least in this respect.

 

In one area of unfair trade practice, according to Schwab, Beijing was giving tax breaks to domestic and foreign producers in China in every area of manufacturing. Those tax benefits gave Chinese manufacturers an edge in competing for business in global markets, even in the US.

 

According to a trade policy report by the WTO, in 2005 nearly 60% of China’s exports of manufactured goods came from companies that enjoyed the tax breaks.  The figure for 2006 is likely to show an even greater percentage.

 

“Because these tax breaks were automatically available to the eligible enterprises, it would appear that a large amount of China’s exports have been benefiting from these pervasive subsidies,” the USTR office said.

 

The second area of WTO-barred trade preferences were import substitution subsidies that encouraged Chinese companies to purchase domestically produced goods instead of imports. This practice amounted to a de facto tariff on imports of “high-quality, fairly priced goods from the US and other countries,” the USTR noted.

 

Ambassador Schwab hailed the US-China memorandum of understanding (MOU) in which Beijing has agreed to end these subsidies as a major breakthrough that could do a lot to help redress the huge trade surplus that China has with the US.

 

The deal will help US companies sell products into the vast Chinese industrial and consumer markets, and it will take some of the unfair competitive edge off Chinese exports to the US market.

 

The importance of a more level playing field for US firms selling into China cannot be overstated. As the USTR notes, China is the United States’ fourth-largest export market and the fastest-growing export market for the US worldwide.

 

In the past 15 years, bilateral trade in goods between the US and China has increased twelve-fold, Ambassador Schwab noted. That trade has nearly tripled in the last six years alone.

 

The agreement also will level the playing field somewhat for US exporters competing against Chinese companies in third countries around the world.

 

To be sure, this one area of agreement does not wipe clean the slate of US grievances over Chinese trade policy. The US has four other WTO complaints pending against China and is pressing Beijing for more transparency in the country’s financial and policy issues and more uniform and consistent practice in its legal and rulemaking processes.

 

Among other issues, the US would like to see China establish a mandatory process for public notice and comment on proposed laws and regulations - a practice common in western industrialized nations and taken for granted by business but almost entirely lacking in China.

 

In addition, the Bush administration and many in Congress and US industry in general want China to do more to revalue its currency, another longstanding issue that gives Chinese producers the upper hand in competing with US and other manufacturers.

 

In speaking to a trade group in Washington this week, Schwab said she hopes the new agreement with China on its subsidies reductions will buy some time for the administration as it works to eliminate these other trade barrier problems with Beijing without heavy-handed interference by Congress.

 

“It is likely that both houses of Congress will grapple with bills related to [Chinese] currency, trade remedies, product safety and enforcement procedures next year,” she said.

 

She cautioned, however, that “These are crude tools for a complex task; they focus on the wrong issues and are likely to do nothing to help or, even worse, will hurt the American workers, farmers and entrepreneurs they purport to help.”

 

Slow and steady negotiations with the Beijing government will get the job done, she said, warning against those “who subscribe to the view that all the ills of protectionism can be cured with more protectionism”.

By: Joe Kamalick
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