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On Trade, A Superpower Summit

Prepared by: Carin Zissis
Updated December 15, 2006

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A high-profile delegation led by Treasury Secretary Henry Paulson, five other cabinet members, and Federal Reserve Chairman Ben Bernanke applied for trade relief in Beijing this week, a stark reminder for Americans of how the world has changed. Along with the Sino-U.S. trade imbalance, talks tackled China’s undervalued currency, intellectual property rights, and American hopes of opening up (China Daily) the Chinese market to foreign investors. The first semiannual Sino-U.S. economic summit was part of the “strategic economic dialogue” launched by Presidents Bush and Hu Jintao in September. Writing in the Washington Post, Paulson called the summit a “pivotal moment for China and for our relationship with that country.” But the trip yielded few signs of concrete progress. China agreed to allow the New York Stock Exchange and Nasdaq open offices in Beijing, but there was no agreement on letting the yuan appreciate. "We have a point of view that there's more risk in going too slowly than there is in going too fast, and the Chinese see that differently," (Reuters) Paulson said at the summit's close. This CFR.org Backgrounder examines the major issues—trade imbalance, currency concerns, protectionism, and intellectual property—dogging the Sino-U.S. economic relationship.

On the eve of Paulson’s departure for China, a report presented to Congress characterized Beijing’s record on meeting World Trade Organization (WTO) agreements “decidedly mixed.” The report from the Office of the United States Trade Representative says Beijing has repealed thousands of regulations to bring its trade policy into compliance since joining the WTO five years ago, yet government intervention still skews its economy and China has failed to control intellectual property violations. Although recent figures show the overall U.S. trade deficit narrowed in October, America’s deficit with China continues to grow (FT) and will likely top last year’s record level of $202 billion. Many experts suggest Beijing deliberately undervalues its currency rate (IHT) to expand exports and so fears concessions that might damage its fast-growing economy.

Despite Paulson’s attempts to dampen hopes for the summit, U.S. lawmakers want results. A bill coauthored by Sen. Charles Schumer (D-NY) and Sen. Lindsey Graham (R-SC) would impose high tariffs on Chinese goods if Beijing doesn’t raise its currency rates. The bill is currently on hold, but TIME points out that Democrats like Schumer and new House Speaker Nancy Pelosi are very unsympathetic toward China for both political and economic reasons.

The Shanghai-based China Economic Review says the Democratic victory forces the White House to engage in a balancing act between domestic and foreign policy issues; Washington needs to partner with Beijing to handle North Korea’s nuclear development, yet “When consumers ask Washington why things are turning sour, a mercantilist, U.S. job-eating China is likely to be blamed.” Jing-dong Yuan, an East Asia expert at the Monterey Institute for International Studies, calls the mandate for Paulson to secure significant concessions during this trip “a mission impossible.” Writing in Asia Times, Yuan suggests that pushing Beijing to reform its economy requires patient diplomacy.

Desmond Lachman, a fellow at the American Enterprise Institute, argues the United States already has been too patient with China. He proposes adopting a harder stance against Beijing’s undervaluing of its currency and failure to stop piracy, saying the potential “breakdown in Sino-U.S. trade relations would be of very much greater consequence for the export-dependent Chinese economy than it would be for the more closed and diversified U.S. economy.” But, in an October CFR.org Online Debate, Stephen Roach, chief economist and director of global economic analysis at Morgan Stanley, warned the Chinese blame game played by American politicians reflects “our inability to face one of our biggest economic shortcomings as a nation—a dearth of domestic saving.”

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