No Easy Answers on China Trade

Politicians in Washington beating the trade war drums with China may want to be careful about what they wish for.

Amid a soaring trade deficit with China, they’ve been insisting that Beijing allow its currency to strengthen, or face punitive measures. Calls for tariffs on Chinese imports have resonated in Congress. Commerce Secretary Carlos M. Gutierrez, although sounding a softer tone during his visit to Beijing this week, warned about risks of an outbreak of protectionism.

But many analysts say trade barriers such as import duties are almost certain to backfire. They’ll hurt the U.S. economy because American multinational firms sell most of the goods that are made in China for export to the United States. And those low-cost Chinese goods have helped damp U.S. inflation.

Nor will a revaluation of the Chinese currency, the yuan, likely do much to improve America’s ballooning trade deficit, according to a growing number of economists.

China’s currency, which is pegged to the dollar, is widely seen as undervalued, making Chinese goods cheaper in overseas markets. But even a 20% appreciation of the yuan would reduce America’s overall trade deficit by only 0.5% next year, according to a study released this week by the Asian Development Bank. That’s partly because imports from China will simply be replaced by imports from other low-cost countries.

A yuan revaluation “is no panacea for global imbalances,” the report concluded.

Gutierrez, in a three-day Beijing visit that began Thursday, hasn’t publicly commented on the currency issue, although he was expected to discuss it today with top Chinese economic officials. Instead, the Commerce chief has focused largely on the Asian nation’s rampant piracy of American goods, saying that failure to make progress in this area will lead to further trade tensions.

Gutierrez offered a willingness to negotiate on the thorny subject of China’s surging textile shipments, which have sparked new quotas from the United States. Gutierrez’s overall tone suggested that the Bush administration might be backing away a bit from a harder line it had taken recently.

“He’s very interested in negotiating. That’s real different than someone who threatens a trade dispute,” said Emory Williams, chairman of the American Chamber of Commerce in Beijing.

Nonetheless, it’s unlikely that stronger protection of intellectual property would be enough to placate members of Congress and some of their unhappy constituents, including manufacturing groups and small businesses that believe the Chinese are engaging in unfair trade tactics.

A bill by Sen. Charles E. Schumer (D-N.Y.) would slap a 27.5% tariff on Chinese imports unless Beijing adjusted the value of the yuan. A preliminary vote on the bill drew surprisingly strong support, with 67 senators voting in favor of it.

For now, most observers don’t foresee a full-blown trade war; the two sides have too much at stake, they say. But pressures are mounting in Washington for policymakers to do something.

There’s a growing belief that “trade relations are no longer fair and that anything is worthwhile to change the direction,” said Jeffrey Bernstein, chairman of the American Chamber of Commerce in Shanghai, who made the rounds in Washington last week. “That’s a very dangerous approach.”

A better strategy, he said, is to push China to open up its markets to foreign companies under its commitments as part of joining the World Trade Organization.

If protectionist measures such as Schumer’s take hold, analysts said, the outcome could prove as damaging to the U.S. economy as to China’s. One big reason: So many things made in China and shipped to the U.S. originate from multinational corporations that have either established their own factories or contracted out to manufacturers in China that produce largely for the American market.

The U.S. imported $197 billion of goods from China last year. At the current 30% pace of increase, those imports could reach $254 billion this year.

A levy of 27.5% on those products would lead to $70 billion in total tariffs. Of that amount, 70% would be borne by American companies such as Dell Inc., Hewlett-Packard Co., Wal-Mart Stores Inc., Nike Inc. and Liz Claiborne Inc., according to estimates by economist Andy Xie of Morgan Stanley.

He said that would deal a big blow to their earnings, jolting stock markets. Companies also may be forced to pass along some of those costs to their customers, which could result in them losing ground to other importers.

“For trade-oriented economies,” Xie said, “bilateral protectionism decreases competitiveness and simply won’t work over time.”

Consider Centurion Electronics, a Shanghai-based affiliate of Centurion Wireless Technologies of Lincoln, Neb. Centurion Wireless is a maker of antennas for the wireless communications market and is owned by Laird, based in London.

Shen Yue, general manager of Centurion Electronics, said about 1,300 employees at two plants in China produced goods for export to the United States and other markets. Shen said his U.S. customers were competing against a growing number of South Korean, Japanese and Taiwanese firms and that a tariff of 27.5% would put them at a disadvantage.

“A tariff will be a real burden to them,” he said.

Telecommunication parts, computer peripherals and other electronics represent a growing share of Chinese exports to the U.S. Textiles and apparel, which have garnered much of the controversy, account for just 11% of overall U.S. imports from China.

Most analysts believe that textile and apparel quotas will only slow production or shift the work to other low-wage countries. Quotas won’t save jobs in higher-cost nations such as the United States, economists say. If it’s not coming from China, then it will be coming from Vietnam or India or Cambodia.

In many ways, China’s current trade tensions reflect its rising economic power and surging trade surplus. A currency revaluation of 10% would undoubtedly curb that surplus and help Beijing cool its overheated economy and reduce over-investments in factories and real estate.

What a currency appreciation isn’t likely to do, however, is help America’s economy a whole lot. If a change in currency severely weakens China’s economy, as some fear, the Asian nation will reduce its demand for American goods and sharply cut back on its purchase of U.S. Treasury securities, which it buys with dollars it gets from exporting to the United States.

Those purchases have helped hold down U.S. long-term interest rates, which in turn keep mortgage rates low. A sudden jump in mortgage rates could cool the hot U.S. housing market.

As for the U.S. trade deficit, China only accounts for 13% of U.S. total imports. Even if a currency adjustment reduced Chinese imports by half and doubled America’s exports to China, it would boost U.S. economic output by only $29 billion, or 0.24%, according to the Asian Development Bank.

Israel Klein, a spokesman for Sen. Schumer, said he expected other Asian countries to adjust their currencies in lock step with Beijing, which would boost the U.S. trade position with other nations. Overall, Klein said, “it would begin to give some balance to a trade imbalance that’s skyrocketed.”

Tanweer Akram, an economist at Economy.com in West Chester, Pa., agrees that the yuan is undervalued. But it certainly isn’t the only reason for the widening U.S.-China trade gap, he said. Although some observers blame Chinese copyright violations and government subsidies, Akram pointed to Chinese companies’ improving competitiveness, the country’s entrepreneurial culture and its outward orientation, particularly in attracting foreign investors.

“To a large extent,” he said, “U.S. companies are responsible for the large trade gap.”