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China Policy: Protectionism in the Wind

Prepared by: Carin Zissis
Updated May 23, 2007

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The United States reached minor economic agreements with Beijing during talks in Washington this week, yet failed to secure a deal (AP) for significant Chinese currency reform. Delegates from the two countries met for the biannual Strategic Economic Dialogue, which serves as chance for discussion between two of the world’s largest economies. Although envoys reached pacts on energy, the environment, and opening Chinese markets to U.S. financial institutions, the currency issue could trouble U.S.-China economic relations. In advance of the talks, a bipartisan group of forty-two lawmakers urged the Bush administration to investigate whether Beijing manipulates the value of the yuan, keeping it priced low against the dollar to boost Chinese exports. They charge this practice exacerbates (Reuters) the U.S. trade deficit, which hit a record high of roughly $233 billion last year.

Such congressional moves reflect renewed protectionist movement in Washington targeting China. Last month, Washington filed two cases with the World Trade Organization (WTO), charging Beijing with failing to protect intellectual property rights or lift barriers to market access. The U.S. Commerce Department also raised tariffs on Chinese coated paper, opening the door for other U.S. industries to seek similar duties.

The WTO cases and coated paper tariffs elicited Chinese objections (IHT). Before leaving Beijing to head the Chinese delegation during this week’s talks, Vice Premier Wu Yi published an editorial in the Wall Street Journal calling U.S. protectionist moves “irresponsible.” In her opening remarks at the talks she warned against confrontation, saying neither country should “force one's own views by imposing pressure” on the other.

However, Beijing maneuvered ahead of the economic summit to placate U.S. lawmakers with a decision to widen the yuan’s exchange rate band against the dollar. The Treasury Department called the change a “useful step” (Thomson Financial). But Paulson has warned that Beijing’s moves to strengthen its currency will have little effect on the trade deficit, and that China must instead decrease dependence (Bloomberg) on exports. Those in Washington who vilify China push for the same kind of currency revaluation policy that harmed Japan’s economy in the 1990s, writes Morgan Stanley Chief Economist Stephen S. Roach. But in an online debate with Roach, Desmond Lachman of the American Enterprise Institute argues greater Chinese exchange rate flexibility would discourage exports as it has in other transitional economies.

Experts predicted little progress on trade and exchange rate issues during the talks. Jeffrey E. Garten of the Yale School of Management writes in Newsweek that regardless of the political fanfare connected with the meeting, “the event has already failed.” He says, despite the notable experience of both envoys, neither Wu nor Paulson can control the political and financial forces that will stoke U.S.-Chinese tensions in the coming years. A $3 billion Chinese bid (BBC) to buy a 10 percent stake in the U.S. private equity firm Blackstone will also likely fire up U.S. political concerns. (Blackstone’s co-founder and Senior Chairman, Peter G. Peterson, also chairs CFR’s board of directors.) The intelligence analysis site Stratfor predicted “quiet cooperation” during the economic dialogue. Yet the site also says that, regardless of the popularity of China bashing, Congress would prefer gradual change of trade and currency policy in China.

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