CHINA TRADE ‘08 - The China Puzzle

By: | at 08:00 PM | Channel(s): International Trade  

In China, puzzles are called yizhi youxi or more directly translated as “intelligence games.” Most of the traditional Chinese puzzles involve a combination of skills deftly utilizing the hands, eyes and ultimately the mind. With a US presidential election year in progress and economic woes from sea to shinning sea, does the US have the patience to solve the trade puzzle of the world’s largest nation?

By George Lauriat, AJOTBack in July, The Economic Policy Institute (EPI) released a report the “China Trade Toll” that asserted that the US trade deficit with China cost 2.3 million Americans jobs between 2001-2007, including 366,000 last year. Although the EPI is a non-profit non-partisan think tank, a portion of the study was funded by the Alliance for American Manufacturing (AAM), a group closely associated with organized labor. Although the criteria that the EPI used for assessing job loss is arguable the report does set the table for the debate on China’s impact on US economics. US manufacturers, labor unions and many lawmakers have long accused China of manipulating its currency the Yuan, to give Chinese companies an unfair advantage in international trade. Further, US companies complain that China has artificially erected trade barriers effectively choking off US exports. Finally, intellectual property laws are still and contentious issue as are China’s labor practices. With the upcoming US presidential elections the economy is perhaps the single most important issue and trade, particularly with China is high on both candidates to do the list. Although neither candidate has hammered out a specific position in relation to China trade, Democratic candidate Barack Obama has generally supported more trade restrictions along the lines of “fair trade not free trade” while Republican John McCain has nominally supported free trade along similar lines of the outgoing Bush Administration.
THE PUZZLEJust about the time the EPI report was making the rounds with legislators, the fourth semi-annual US-China Strategic Economic Dialogue (SED IV) was finishing up. The SED began back in 2006, when the Bush Administration, under considerable pressure from both sides of the aisle, tried to formalize by informalizing its trade talks with China. The idea was if the senior trade negotiators could sit down together around the table and address very specific mutual issues, real progress could be made that each group could take back to their respective leadership. From the US point of view that process involved addressing the revaluing of the Yuan, encouraging the Chinese to spend more, adopt credit, begin life and health insurance programs for workers, buy more goods to cut down the trade deficit; in short to be more American in their ways. The US wants to see Beijing shift the economic emphasis from investment in export-oriented activities to consumption. But the mystery is not what the US wants, that has been made abundantly clear in the SEDs, but finding out what Beijing wants… and is willing to do.
Back in July of 2005, China stopped pegging the Yuan exclusively and pegged the currency against a basket of currencies and allowed a float within a narrow range. Since that time the Yuan has appreciated around 20% against the dollar. This is still quite a ways from the 44% mark that some legislators’ thought was the real difference but nevertheless the rise is quite considerable. The concept was that the rise in the Yuan versus the dollar would help open China up to more US imports. It is hard to say that the rise in Yuan itself was solely responsible for the increase in US exports to China, since the surge was underway before 2005, but it definitely helped accelerate the process. According to a recent report issued by the US-China Business Council, from 2001-2007, US exports to China increased by 301% while increasing by 44% to the rest of the World. In fact China is now the third largest market for US exports behind only Canada and Mexico – the NAFTA trading partners.

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American Journal of Transportation