Fighting Words Belie Trade Reality
U.S. Makes Demands on China but Lacks Power to Force Change

By Paul Blustein
Washington Post Staff Writer
Tuesday, April 18, 2006

The drumbeat is getting louder as Chinese President Hu Jintao heads to Washington this week, with agreement widespread among Bush administration officials and lawmakers of both parties, together with many business groups and economists.

China, they say, must let its currency rise in value to reduce the unfair advantage its exporters enjoy against U.S. manufacturers. China must further crack down on the piracy of American films, music and other products. And China must open its market wider to help shrink the U.S.-China trade imbalance, which soared to $202 billion last year -- accounting for more than one-quarter of the U.S. trade deficit.

But for all the consensus on the ultimate objectives, it is far from clear how the United States can make China take the steps necessary to help balance the Sino-American trade relationship. If Hu's visit generates only modest progress on the trade front -- as most analysts expect -- it will underscore an uncomfortable problem for U.S. policymakers: Washington's ability to compel change in China's trade practices is limited, both for legal and economic reasons.

In the latest illustration of congressional ire over U.S.-China trade ties, Senate Minority Leader Harry Reid (D-Nev.) released a letter to President Bush yesterday disparaging as ineffective the "occasional tough words and saber-rattling" that the administration has used in prodding Beijing. The letter complained that the White House's record "has been badly mishandled . . . whether the issue is China's unfair manipulation of its currency, China's rampant intellectual property piracy, China's massive state subsidies" or other sources of friction.

But gone are the days when the U.S. Trade Representative's office could readily threaten to slap tariffs unilaterally on Chinese imports, as the Clinton administration did in the mid-1990s in frustration over the illegal copying of compact discs. China joined the World Trade Organization in 2001, which required it to dismantle many of its trade barriers but also gave it protection against the use of unilateral sanctions by other WTO members.

Perhaps more important, the economic links between the United States and China are vast and intertwined, with Beijing using the dollars it earns from its exports to invest hundreds of billions of dollars in U.S. Treasury securities, thereby helping to keep interest rates low for American borrowers. So while a breach would severely damage China's export-dependent economy, the economic risks to the United States would hardly be trivial.

"We have limited leverage because the two economies are so bound together," said Jeffrey A. Bader, director of the China Initiative at the Brookings Institution and a former official in the Bush and Clinton administrations. Consider, Bader said, the steps the United States might take against China's currency policy, which keeps the yuan's value at about 8 yuan per dollar -- an exchange rate that critics say is as much as 40 percent lower than the laws of supply and demand dictate.

"Suppose we impose some severe sanctions on Chinese goods. Well, the Chinese companies exporting to the United States are mostly foreign-owned, so you would be hurting those companies, and profoundly hurting the rest of Asia, because Asian countries are pouring unassembled products into China for final assembly," Bader said. "So if we have a cycle of retaliation with China, there are going to be tremendous ripples throughout the whole region, and one has to assume this would cause a global downturn. That is why it's hard to conceive of a broad retaliation that doesn't ultimately come back to bite us."

That scenario is one reason the administration has opposed the bill sponsored by Sens. Charles E. Schumer (D-N.Y.) and Lindsey O. Graham (R-S.C.) that would impose 27.5 percent tariffs on imports of Chinese goods unless Beijing allows the yuan to appreciate. Despite claiming broad Senate support for the bill, Schumer and Graham agreed after a visit to China last month to defer a vote on it -- because, they said, Chinese officials had convinced them that they would soon make progress toward a more flexible currency system.

Replacing Schumer-Graham as the most prominent piece of China trade legislation is a bill proposed by two lawmakers that would also punish Beijing for failing to address the currency problem. But it would impose much milder sanctions, illustrating the reluctance of U.S. policymakers to risk a trade war that could get out of hand.

This bill, authored by Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) and the panel's ranking minority member, Sen. Max Baucus (D-Mont.), would threaten to bar China from gaining some economic privileges it seeks, including increasing its voting power at the International Monetary Fund.

On patent and copyright piracy, the administration is also hamstrung to some degree. It can bring a case against China at the WTO, but "American companies are reluctant to provide facts that can be put into cases" for fear of offending Chinese officials and risking their ability to conduct business in China, said Gary C. Hufbauer, a trade specialist at the Institute for International Economics. "So putting together a plausible case is difficult."

Administration officials counter that Beijing is demonstrating a new willingness to improve its intellectual-property protections because it recognizes that doing so will help the economy advance. They cite a recent decree that newly manufactured computers must have legal operating-system software installed before they are sold or shipped -- a move especially appreciated at Microsoft Corp., which Hu is scheduled to visit today.

Moreover, "we may be getting to a point where a [WTO] case on some specific issues would be the most effective way to address those issues," said Tim Stratford, the assistant U.S. trade representative for China. But he acknowledged: "Some companies do have concerns about the data they can provide, and that is one thing we have to factor into this."

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