China's industrial policy is bigger concern than yuan, U.S. executives say

By John Pomfret
Washington Post Staff Writer
Friday, May 7, 2010

Congress and the Obama administration are paying too much attention to China's currency and not enough to other market-distorting tactics by China's government. That's the message being carried by a delegation of senior U.S. executives, representing the American Chamber of Commerce in Beijing, who have traveled to Washington this week to add their voice to the conversation.

For months, the Obama administration and members of Congress have put pressure on China to allow the value of its currency, the yuan, to rise against the dollar. Sen. Charles E. Schumer (D-N.Y.) has led a congressional charge, co-authoring legislation that would slap tariffs on Chinese goods if China did not allow the yuan to appreciate vis-a-vis the greenback. President Obama and Treasury Secretary Timothy F. Geithner have publicly called on China to allow the yuan to float higher as well.

U.S. officials, senators and some economists have predicted that if China allows the value of the yuan to rise, it will mean a smaller trade deficit with China, more American exports and more jobs for American workers.

Fat chance on both counts, according to the American Chamber delegation.

It might make good economic sense for China to stop subsidizing its exports with a distorted exchange rate, but it's silly to think that the United States is going to be a major beneficiary from such a move, the delegation and other business groups are arguing.

For one, the stuff China sells us has been imported by the United States from other countries for decades. So if we don't buy it from China, we'll buy it from someone else. Take TVs. Twenty years ago, they all said "Made in Japan" on the back. Now they say "Made in China." If China allows the yuan to appreciate, it's not like TV manufacturing is going to move back to the United States and RCA Victor will rise anew. Americans will just buy them from someplace else.

What the Chamber members want Washington to pay attention to, however, is the more nettlesome issue of how China is patching together an industrial policy. That, they suggest, will do more long-term damage to the United States than will its off-kilter exchange rate.

This includes China's attempts to use regulations to block Western firms from selling their products to Chinese government agencies, new Chinese standards in telecommunications and other areas that would stop the country's firms from buying Western goods, and new rules that force Western companies to give up technological secrets in exchange for a piece of China's market.

An example? China used to import close to 100 percent of its wind-power turbines. Now it makes close to 75 percent of those that are sold in China. Chinese firms haven't developed wind-turbine technology; they've just required that foreign firms selling turbines in China share that technology, and now their firms manufacture the turbines at a lower cost.

"For years, the Chinese government promised there would be a gradual opening of the market to foreign companies," said Christian Murck, the leader of the Chamber delegation. "But now in a range of areas, there is increasing protectionism."

What Murck and his colleagues want to see is a coordinated U.S. response to these pushes by China to halt Western products from entering China's market.

"The Chinese government is more than happy to keep the focus on the currency because it's not the real problem," said a member of Murck's team. "The real problem is China's industrial policy and our inability to deal with it."

Murck argued that if the Obama administration really wants to double exports over the next five years, it won't be able to do so without China, which for a decade has been the fastest-growing big export market for American goods. U.S. firms sold more than $80 billion of goods to China last year.

But confronting China over these issues is more complicated than fighting Beijing over the currency issue. It demands a clear U.S. trade policy, and agencies such as the departments of Commerce and Treasury and the U.S. trade representative would have to work together as well.

The other problem, Murck said, is that Western businessmen are trying to make the argument that an open market -- and not protectionism -- will benefit China in the long run at the time when "the prestige of the Western economic model is at its lowest ebb."

"That is a tough one for us," he said.

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