Debate Rages Over How To Respond To China’s Economic Challenge

Criticism of China’s currency manipulation has become the focus of public dismay over the growing trade deficit and loss of three million manufacturing jobs since 2001. The issue has grown political legs, forcing the Bush Administration to pay heed. In a sharp departure from past policy, Treasury Secretary John Snow has publicly called for Asian countries to adopt more “flexible” exchange rates, though he has been reluctant to single out China by name.

Beijing has a trade surplus with the United States of about US$120 billion this year. The rule of thumb is that every $1 billion in the trade balance represents the gain (surplus) or loss (deficit) of 10,000 jobs. China keeps its currency at a fixed exchange rate of 8.3 yuan to the dollar, a rate that has remained constant since 1994 when its devaluation sent the Pacific Rim economies into convulsions from which they have still not fully recovered. Many experts believe the yuan is undervalued by about 40 percent against the dollar, which adds to other Chinese trade advantages from cheap labor and government subsidies.

Under pressure from the textile and furniture industries in politically sensitive southern states, safeguard provisions have been imposed on some imports of Chinese knit fabrics and garments, and the Commerce Department has opened an investigation into the sale of Chinese bedroom sets in the United States. However, the Bush Administration has made it clear that it prefers to “discuss” trade issues with Beijing rather than apply pressure.

China, however, has already made it clear that it will not be talked out of industrial and export policies that have paid such handsome dividends. Beijing believes that with so many major American firms having built plants in China to take advantage of its mercantilist policies, it will be able to muster substantial political clout in Washington to head off any anti-Chinese policy. James Sasser, the U.S. ambassador to China from 1995 to 1999 and a senator before that, recently that told Bloomberg news, “The Chinese really don’t do any lobbying. The heavy lifting is done by the American business community.”

On his recent visit to the United States, Chinese Premier Wen Jiabao first went to New York where he rang the bell to open the New York Stock Exchange and spoke to the American Bankers Association. When he came to Washington, he appeared at an event sponsored by the Chamber of Commerce before meeting with President George W. Bush. Of the Fortune 500 companies, some 400 have set up operations in China. They lobby heavily for appeasement policies to protect their investments, and an open American market to which they can export much of what they produce in Chinese factories.

Yet, there are voices of concern being heard in Washington, including some from leading American business executives. The National Association of Manufacturers (NAM) and other members of the “Sound Dollar Coalition” are considering filing a case with the U.S. International Trade Commission charging China with using currency manipulation to gain “unfair” trade advantages under Section 301 of the Trade Act of 1974. Under Section 301, the United States can impose trade sanctions on countries that restrict U.S. exports. The remedy is to impose duties on imports from the offending country in order to offset the damage to U.S. exporters and as leverage in trade talks to redress the underlying problem of restricted foreign market access.

The problem with the NAM initiative is that it would not only take a long time to work through the overly legalistic process of the ITC (which could easily run a year), but it seems also to miss the point. The real issue is not the blocking of exports to China, but the flooding of America with Chinese goods. It has been clear for some time that the predominant business model for selling in China is to produce in China, a model Beijing strongly favors. There is little chance that the United States is going to be able to export its way out of its massive trade deficit with China.

The choice of Section 301 by NAM–instead of Section 201, which protects American firms from injury by imports–has the practical benefit of providing a single blanket case against Chinese policy rather than a series of industry specific complaints. It is also ideologically more comfortable. NAM is torn between its transnational corporate members, who are heavily involved in China, and the larger number of smaller American member companies facing import competition from China. NAM has to say something on behalf of the majority of its members, but cannot advocate import restrictions that are opposed by its biggest financial contributors. By framing their action as a support for exports, they can appear to be boosters of trade rather than as “protectionists.”

It may, however, be time to consider protecting strategic sectors of the American economic base. In October, the President’s Council of Advisors on Science and Technology’s Subcommittee on Information Technology Manufacturing and Competitiveness issued its “Preliminary Draft Findings and Observations.” Members of the subcommittee include chairman George Scalise, president of the Semiconductor Industry Association; Michael Dell, CEO of Dell Computer Corp., and Gordon Moore, chairman emeritus of Intel. The paper warns that U.S. technological preeminence is not assured because as manufacturing is moving overseas, research and development are following. This risks a shift in future innovation that could leave America behind the technology curve. Global R&D centers are emerging around manufacturing in China, where labor costs for R&D design capabilities are one-third to one-tenth what they are in the United States.

The Boeing Company recently held a conference in Beijing to discuss the design and construction of its new 7E7 jetliner. The 7E7 is to be a super-efficient, long-range aircraft pushing the edge in aviation technology. Boeing China president David Wang was quoted in China Daily as saying that Boeing wants more Chinese participation in the program because it sees Beijing as a strategically important part of its globalization strategy. “Boeing should become more Chinese in China,” said Wang, “Twenty years from now, China will view Boeing as a global China brand, not just a global brand….We must be more Chinese in our leadership, in content… have more designs, capability coming from China in the long term.”

Concerned about such trends, the United States-China Economic and Security Review Commission sent recommendations to Congress on how to respond to China’s economic challenge. Its October 15 report suggested that President Bush’s Manufacturing Initiative “include provisions that strengthen the competitiveness of U.S.-base manufacturers in light of the growing shift of production to China, especially in high-tech and R&D.” The Commission also wanted to find out more about investment and R&D flows to China from U.S. companies that are building not just factories, but research labs and training centers for Chinese engineers and scientists in military relevant sectors like aerospace. It recommended that Congress “consider establishing an enhanced, mandated corporate reporting system to capture better this information.”

Several initiatives have been launched in Congress to counter Beijing’s industrial policies. On October 29, the House voted 411-1 in favor of a non-binding resolution by Rep. Phil English (R-PA) calling on China to fulfill its commitments under international trade agreements and for the Bush Administration to take action to support the U.S. manufacturing sector. A bipartisan group of Senators led by Charles Schumer (D-NY) and including Elizabeth Dole (R-NC) and Hillary Clinton (D-NY) among its twelve co-sponsors, introduced S. 1586. This bill would impose an across-the board tariff of 27.5 percent on imports from China to offset Beijing’s currency manipulation. The bill cites Article XXI of the 1994 GATT which the lawmakers argue “allows a member of the World Trade Organization to take any action which it considers necessary for the protection of its essential security interests. Protecting the United States manufacturing sector is essential to the interests of the United States.” This is an important bill symbolically because it has moderate senators from both parties talking about imposing tariffs. However, it faces significant legislative hurdles and opposition from the Bush Administration.

Beijing’s idea of trade discussions was demonstrated by Premier Wen on his recent U.S. visit. He voiced displeasure with restrictions on the export to China of high-tech products with potential military applications, telling the American Bankers Association, “I ardently hope that the relevant U.S. departments will make a clean break with those obsolete concepts and anachronistic practices, and throw them into the Pacific Ocean.” All that China wants to import is technology and capital with which to build what Beijing calls “comprehensive national power.”

As Congress returns in January and the 2004 election approaches, it remains to be seen whether the debate over U.S. policy toward China will move beyond talk of “level playing fields” to a discussion of ways to gain an American advantage more in line with the way that Beijing thinks of the international economic struggle.

William R. Hawkins is senior fellow at the U.S. Business and Industry Council in Washington, DC.