U.S.-China Trade Ties Erode Amid Accusations
Officials From Each Nation Complain of Protectionism

By Ariana Eunjung Cha
Washington Post Foreign Service
Friday, February 20, 2009

BEIJING -- The global financial crisis is bringing out the worst in the trade relationship between the United States and China.

After three years of largely friendly talks about economic issues, both in the past few weeks have blamed the other for the world's problems.

U.S. Treasury Secretary Timothy F. Geithner accused China of "manipulating" its currency, vowing in written testimony submitted for his confirmation hearing that the United States would act "aggressively" to remedy the situation. The U.S. Trade Representative's office, in a harshly worded and wide-ranging complaint to the World Trade Organization in December, alleged that China uses cash grants, cheap loans and other subsidies to illegally aid its exporters.

China, for its part, has bashed the "Buy America" program embedded in the just-passed stimulus package, calling it "poison to the solution" of the global economic crisis. At the World Economic Forum meeting in Davos three weeks ago, Chinese Premier Wen Jiabao, without naming the United States explicitly, blamed the financial crisis on unsupervised capitalism.

"The crisis has pushed the China-U.S. relationship to a flash point. From now on, it will either become more stable or more confrontational," said Mei Xinyu, a trade expert with the Chinese Commerce Ministry's research arm.

When Hillary Rodham Clinton arrives in China on Friday as part of her first diplomatic visit as secretary of state, she said she hopes to broaden the bilateral dialogue to include climate change and human rights. But it is economic cooperation that will be at the forefront of many people's minds.

Both the United States and China, the world's No. 1 and No. 3 largest economies, have railed about the dangers of economic protectionism, but so far both have been guilty, according to the other, of practicing it.

"While both countries have come to an agreement that trade protectionism shouldn't be practiced by any country, when it comes to the details -- maybe due to domestic reasons -- they may feel pressured toward it," said Jia Qingguo, the vice dean of Peking University's international studies school.

Li Wei, a researcher at the Chinese Academy of International Trade and Economic Cooperation, said "the purpose of 'Buy America' is clearly to kick out foreign competitors."

In the United States, industry groups are pushing for more action against China, saying it is trying to export its way out of the crisis by dumping cheap products abroad.

The latest figures, released in mid-February, show that the U.S. trade deficit with China hit at an all-time high of $266.3 billion in 2008, the worst imbalance ever recorded with any country. It came as the overall trade deficit shrank for the year and hit its lowest levels in six years in December amid depressed demand for imports.

U.S. steel and textile manufacturers have been especially loud in their call for the Obama administration to be more aggressive with Beijing. The U.S. International Trade Commission has imposed duties of 35 to 40 percent on some steel products from China -- imports hit an all-time high this fall -- to counteract Chinese subsidies. The textile lobby has accused China of increasing its share of the U.S. apparel market to more than 50 percent this year by using export subsidies. The Dec. 19 WTO petition filed by the USTR addresses some of these concerns; a WTO official said the complaint is still being reviewed.

Since the economic crisis began in America more than a year ago, China has been making a number of small but significant changes to its trade policy. Taken together, the changes are radical, some experts say.

Over 30 years of reforms pioneered under Chinese leader Deng Xiaoping, the country has opened up its economic practices and reduced its companies' dependence on the state in the name of free trade. But over a few months, as the global slowdown has dragged down its export market, China rolled back a number of these reforms.

Since July, Beijing has raised rebates of value-added taxes at least five times for all sorts of exported goods ranging from shoes and sewing machines to motorcycles. In the fall, China stopped letting the yuan rise against the dollar, reversing some of the gains it had made over three years. The United States has accused China of keeping its currency artificially low, helping its exporters and hurting American competitors. And in December, China reduced export duties on some steel, chemical, grain and fertilizer products.

Scott Paul, executive director of the Alliance for American Manufacturing, said the fact that China now accounts for almost half the U.S. trade deficit is disturbing. The Alliance is one of a number of industry groups that blame China for the loss of American jobs. "We must insist that China honor the commitments it made to gain greater access to the U.S. market. China must stop illegally subsidizing its industries, misaligning its currency, and dumping products into the U.S. market," Paul said in a statement.

But taking an aggressive stance on China in terms of economic issues, as Clinton has in the past on human rights, may be dangerous, experts say. China is the biggest overseas holder of U.S. Treasury securities, having invested more than $1 trillion into government bonds and mortgage debt. The Chinese government has never officially made any threats about these holdings. However, academics who are often used to convey the prevailing feeling among the country's leaders hinted in the past that the government would not hesitate to use what state media have called the "nuclear option" of liquidating its dollar holdings if Washington imposes trade sanctions related to the debate over the yuan or other alleged problems. There's already some evidence that China is starting to reduce its holdings of U.S. debt as it tries to diversify its portfolio to mitigate the harm a falling dollar may have on its coffers.

Trade researcher Mei said that from the Chinese point of view, Geithner's remarks on the yuan may have been a test. The comments were later tempered by the Obama administration saying it hadn't made any formal decision on the issue and Obama discussed the remarks with Chinese President Hu Jintao in a telephone call shortly after taking office.

"They may have wanted to use this as a way to try to test China's reaction. If China acted weak, then the U.S. would probably be on China step after step. But China didn't," Mei said.

Indeed, even as China's exports have plummeted and it is struggling with unemployment, it has seized opportunities to build allies and raise its position in a new economic world order.

It has lent hundreds of millions of dollars to ailing countries such as Jamaica, Tanzania and Pakistan. In addition, in late December, China took the first steps to making the yuan, which is not freely convertible into other currencies, an international standard like the dollar or Euro. It signed agreements with eight neighboring countries to allow settlement of trade payments in yuan and is encouraging other countries to include the yuan in their mix of foreign exchange reserves.

Researchers Crissie Ding in Shanghai and Liu Liu in Beijing contributed to this report.

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