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Administration Officials Defend China Trade Policies

Wednesday, November 02, 2011
Sandler, Travis & Rosenberg Trade Report

During a recent hearing in front of the House Ways and Means Committee, two Obama administration officials defended the White House’s approach to China trade issues. While many lawmakers are pushing for congressional approval of legislation penalizing China for the inflexibility of its exchange rate regime, the officials, like the committee’s Republican leaders, pointed out that this is just one of many issues in the bilateral trade relationship.

Lael Brainard, under secretary of Treasury for international affairs, indicated in her testimony to the committee that the U.S. needs to be careful in its trade relations with China because of that country’s important role in the domestic economic recovery. “In the wake of the financial crisis, with American households saving more and demand weak in Europe and Japan, our exports increasingly will be directed at the fast-growing emerging markets if we are to create the good jobs with good wages that we need to grow our economy,” she said, and “for the next decade, China is expected to be the biggest source of demand growth in the global economy.” China’s economy will see annual growth averaging 9.4% for the next five years and China’s share of global imports will likely jump from 6% in 2008 to over 9% in 2012, she said, so “this is a market opportunity that we must seize.” In addition, foreign investment is playing an increasingly important role in supporting jobs in the U.S., and “in the decade ahead, China will be a fast-growing source of foreign direct investment.”

Deputy U.S. Trade Representative Demetrios Marantis made similar points about the importance of the Chinese market to the Obama administration’s National Export Initiative, which seeks to double U.S. exports in an effort to add millions of new domestic jobs. Marantis noted that since 2001 U.S. manufactured goods exports to China have quadrupled, agriculture exports are up 800%, services exports are up nearly 300% and investment in China has grown 400%. Ways and Means Trade Subcommittee Chairman Kevin Brady added that in 2010 U.S. companies exported more than $90 billion worth of goods to China, a 32% increase from the year before that was double the gain in exports to the rest of the world.

Of course challenges in the Sino-U.S. trade relationship remain, Brainard said. Three of the highest priority issues are policies that favor domestic state-owned enterprises through barriers to foreign goods, services and investment as well as subsidies and preferential access to raw materials, land, credit and government procurement; “rampant theft of intellectual property;” and the need for China to “shift to a pattern of growth that can be sustained, drawing on home-grown demand rather than excessive dependence on exports,” which “requires that China bring its exchange rate into alignment with market fundamentals.” Marantis added that other areas of concern include China’s sanitary and phytosanitary barriers to U.S. agricultural exports and the “operation of China’s legal and regulatory system.” He said many of these policies “reflect China’s strengthening of state control over its economy and a retreat from its initial strong push to liberalize markets in the first years after its World Trade Organization accession.”

However, knowledgeable observers hold that Beijing typically acts in its own self-interest and not when pressured by outside actors, and Brainard suggested that the time is soon coming when China’s interests will be aligned with those of the U.S. with respect to the issues listed above. China already is seeing rapidly slowing labor force growth, the number of workers will begin to decline soon, and China’s cost advantage is rapidly eroding, she said. “In the face of overinvestment and rising wages, China will need to move up the value chain,” but “China’s weak protection and enforcement of intellectual property rights threaten to retard the development of Chinese innovation and Chinese brands.” This transition is also hindered by “China’s continued excessive reliance on administrative controls, such as credit quotas to maintain price stability and intervention to temper exchange rate adjustment, that are subject to political determinations and thus leave policy making behind the curve.”

Brainard was also circumspect on the issue of China’s currency, which has been the primary focus of legislative efforts to bring the U.S.-China trade relationship more into balance. For one thing, she noted that the yuan has appreciated nearly 40% against the dollar over the past five years in real terms. This increase coincided with a significant total rise in the U.S. trade deficit with China, and Brainard said a further appreciation of the yuan “will not erase our trade deficit” as some have claimed. While she acknowledged that the value of the yuan “remains misaligned” and that “a faster pace of appreciation is needed,” she expressed confidence that as with other trade irritants China is likely to take the sort of action the U.S. would like to see once it realizes that doing so will help it achieve its own economic goals.

Given these considerations, both officials indicated that the most effective way for the U.S. to secure progress on bilateral trade issues is through cooperation and dialogue, reinforced with enforcement action when necessary. They argued that this approach has been successful, pointing to beneficial changes obtained as a result of regular talks within the Strategic and Economic Dialogue and the Joint Committee on Commerce and Trade as well as disputes taken to the World Trade Organization.

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