US vs China on trade

Interesting. link

Analysis: U.S. Lacks Leverage on Trade

By MARTIN CRUTSINGER, AP Economics Writer Fri Apr 21, 7:58 AM ET

WASHINGTON - Once again,
President Bush had a difficult time wresting concessions from Chinese President
Hu Jintao. And for good reason.

Bush may be the leader of the world's only superpower, but when he talks to the Chinese, it's like discussing an overdue loan with his banker. There's not much leverage.

The summit on Thursday was Hu's first visit to the White House since he became China's top leader three years ago. But he and Bush have met five times in just the past year, including a trip Bush made to Beijing in November.

At each of those meetings, the list of U.S. trade demands has been the same: China must stop unfairly depressing the value of its currency to gain trade advantages; it must halt rampant copyright piracy that is costing American companies billions of dollars in lost sales, and it must open its markets wider to U.S. exports.

The urgency of those demands has grown as America's trade deficit with China has soared; the trade imbalance hit another all-time high last year of $202 billion.

That deficit, which represented more than one-fourth of America's record imbalance with the world in 2005, has sparked growing unrest on Capitol Hill and prompted a spate of bills to penalize China unless it halts trade practices that critics blame for contributing to the loss of nearly 3 million manufacturing jobs since Bush took office in 2001.

With an eye toward the November congressional elections, the Bush administration has stepped up its own rhetoric. But so far the tough talk has produced few results.

Hu's comments during his half-day summit with Bush failed to go farther than promises he has made before. The biggest disappointment came in the area where the administration had once held the highest hopes, that China would commit to moving faster to allow its currency to rise in value against the dollar. A weaker dollar against the yuan would make American goods more competitive against Chinese products.

But the blunt reality is that the Bush administration has little leverage to make China do more. Since China joined the
World Trade Organization in 2001, the United States can no longer threaten to impose unilateral sanctions as the Clinton administration threatened to do in the mid-1990s in a copyright piracy fight of that era.

The United States can bring WTO cases against China as it did last month in a dispute over auto parts. But on currency manipulation — the area that promises to make the biggest difference in reducing America's trade imbalance — experts say the United States would have slim chances of prevailing before the WTO, in part because no country has faced those charges before.

Members of Congress are pushing legislation that would slam all Chinese goods with penalty tariffs of 27.5 percent if China does not move faster to allow its currency to rise in value. But such a draconian measure would basically penalize American consumers who have grown to like the low prices offered by a flood of Chinese imports of clothes, athletic shoes, toys and televisions.

"It's very easy to talk about limiting imports of bedding or shoes or whatever, but once you do it and prices shoot up, then you will get a backlash," said Gary Hufbauer, a trade economist at the Institute for International Economics, a Washington think tank.

Such an action could also spark a trade war, with China retaliating against U.S. exporters, either directly by winning a WTO case that the U.S. tariffs violate WTO rules or more subtly by making sure that U.S. companies like Boeing Co. don't get the next big round of contracts.

Bush was also in the delicate position during Hu's visit of trying to get trade concessions from China while at the same time seeking China's support on a wide range of foreign policy issues, including dealing with the nuclear ambitious of
Iran and
North Korea.

And then there is the issue of China's vast holdings of U.S. assets. The massive trade deficits the United States has run up with China has meant the transfer of billions of dollars into Chinese hands. That money is used to buy U.S. Treasury securities and other assets.

The deficits have gotten so huge, that China's holdings have ballooned. China is now the second largest holder of U.S. government debt, with $265.2 billion in Treasury securities, and its total foreign reserves have just surpassed Japan's to become the largest in the world.

The willingness of the Chinese to hold that debt has helped to keep U.S. interest rates low, which has been a boon to American home buyers and other borrowers. But if for some reason the Chinese suddenly reversed policy and started dumping U.S. assets in favor of parking their reserves in other countries, that could have a serious impact on the U.S. economy by sending U.S. interest rates up sharply.

The predicament of being in hock to China and other foreign countries was highlighted on the day of Hu's visit by an editorial cartoon in The Washington Post which showed Bush and Hu meeting.

In the cartoon, Bush says, "I'm the leader of the most prosperous and powerful nation in the world today."

To which Hu responds, "I'm the repo man."