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China To Maintain Growth And Prop Up Industries At All Costs

U.S., China: Trade Tensions on the Rise?

Stratfor Today » July 15, 2009 | 2101 GMT

U.S. Secretary of Commerce Gary Locke said July 15 that the trade imbalance between China and the United States is unsustainable. Locke and U.S. Energy Secretary Steven Chu are visiting China July 14-17 to promote environmentally friendly policies and greenhouse gas reductions, with an emphasis on cooperation in business sector clean technology, as well as to discuss key economic issues as trade tensions between the two are on the rise.

The trade imbalance between the United States and China is not sustainable, according to U.S. Secretary of Commerce Gary Locke, speaking to the American Chamber of Commerce and U.S.-China Business Council on July 15. Locke is visiting Beijing and Shanghai along with U.S. Energy Secretary Steven Chu in an effort to drum up support for cooperation on greenhouse gas reductions and improvements in the countries’ bilateral trade relationship.

Trade tensions are rising around the world as the global recession drags on and countries feel the amplifying effects of lagging unemployment and income losses. The mounting pressure on governments has spurred them to resort to self-interested and protectionist policies that come at the expense of their trade partners. Nowhere is this trend more evident than in China’s relations with the outside world. China is one of the world’s biggest trading nations, but the central government is strengthening its control over the country’s mostly state-directed economy, in order to manage the rocky economic situation and prevent conflagrations of social unrest. Though Chinese media has been rife with good reports, the real continuing economic pain is taking a heavy toll on China, whose economy is highly dependent on external trade and investment, and has experienced a painful year with exports continuing to sag (June exports were down 21.4 percent from a year earlier) and foreign direct investment down by 17.9 percent for the first half of the year.

Beijing has passed a raft of measures to fight the recession and stimulate its economy that have provoked criticism, including export restraints on raw materials, rebates for exporters (on a wide range of products from textiles to iron and steel to electronic information), pro-domestic government procurement rules, and market access restrictions, among others. In the latest row beginning in June, the United States and the European Union leveled complaints at the World Trade Organization (WTO) over China’s caps and duties on raw materials exports, which benefit China’s domestic steel, chemical and other industries while obstructing foreign companies’ access to the mineral inputs in question. The United States and others also have protested against China’s attempts to require foreign companies making or selling computers in China to adopt the country’s “Green Dam” internet filtering software.

The current U.S. commerce and energy secretaries’ visit to China takes place in this context. A primary reason for the visit is the promotion of environmentally friendly policies and greenhouse gas reductions, with an emphasis on cooperation in business sector clean technology. The United States is pressing for China to take an active role in carbon emission reductions: the administration is serious about forging a global climate treaty in Copenhagen in December to replace the Kyoto Protocol, but it needs Beijing to join for the treaty to have a chance at success. Beijing, however, blames the Western developed nations for causing the climate problem in the first place, and in return for its cooperation wants preferential treatment from the United States in gaining access to U.S. technology and investment so it can address its own pollution and environmental issues. The United States sees an opportunity in getting China to commit to buying clean technologies that American manufacturers are expert at designing.

But the U.S. visit is not limited to environmental issues. In his July 15 speech, Locke also criticized China’s export-reliant economy, its low domestic demand, exchange rate policies, lack of regulatory transparency, and its trade barriers to its domestic markets, all of which are priority issues for the United States. The United States also hopes to export more to China and reduce the U.S. trade deficit with China, which reached $268 billion in 2008. All of these issues are coming to the forefront as the United States and China prepare to meet for the Sino-U.S. Strategic and Economic Dialogue in Washington in late July. U.S. Treasury Secretary Timothy Geithner and Chinese Finance Minister Wang Qishan will discuss economic matters (while Secretary of State Hillary Clinton and State Councilor Dai Bingguo will discuss strategic matters). Both sides hope the meeting will give them a clearer read of their partner’s thinking going forward.

So far however China has responded coolly to U.S. complaints. China justified a bevy of its latest protectionist “Buy China” measures, which require Chinese government at every level to buy Chinese goods and services unless they are not available domestically, by referring to the “Buy American” clause in the Obama administration’s economic recovery plan. On the trade balance, China points out that the yuan exchange rate has climbed considerably in recent years and held relatively steady during the crisis, so it cannot be blamed for “manipulating” its currency to make exports more attractive. On the trade imbalance, Beijing points to the U.S. ban on high technology exports to China, emphasizing that the United States will have to become more comfortable with selling China its state of the art designs before it can complain about Chinese markets not being accessible enough. China has criticized carbon tariffs as being protectionism in disguise and violating WTO rules. In addition, all the while Beijing has continued grumbling about the dangers of the American-triggered financial crisis and the enormous expansions in the U.S. budget deficit, which threaten to diminish the value of Beijing’s nearly $1 trillion in dollar-denominated assets.

In other words, while China has its own reasons to negotiate on climate change, there are no immediate answers to the driving forces behind the U.S.-China trade problems. And the stage is set for more disagreements in the near future, as the United States has shown an inclination towards protectionism amid the crisis and China certainly does not intend to give in to U.S. demands easily. It simply has too much at stake given the volatile social situation at home and will opt to maintain growth and prop up its industries at all costs. Since joining the WTO in 2001, China has become particularly skillful at finding the advantages in WTO regulations, and it is through these mechanisms that China will seek to fend off or strike back against the United States and others in the increasingly competitive trade environment that is emerging as the recession continues.