China--U.S.: A Bulging Trade Gap : Commerce: The Chinese are accused of restricting access to their markets. Officials are stepping up efforts to avoid a trade war.

By GEORGE WHITE

March 11, 1991 12 AM PT

TIMES STAFF WRITER

The United States’ ballooning trade deficit with China, expected to become second only to Japan’s by year-end, is becoming a sore point in U.S.-China relations and could spark a trade war between the two.

Some American industries contend that the imbalance is the result of unfair Chinese trade practices. They are calling on the Bush Administration to retaliate by selectively raising tariffs on some of China’s more important exports.

The dispute could also result in higher prices for Chinese goods if congressional critics of China’s human rights policies use the dispute to gain support to remove Beijing’s most favored nation trading status, which keeps tariffs on Chinese products as low as those for most other U.S. trade partners.

Such punitive action could ignite a trade war that in turn could undermine efforts in Beijing to push the nation toward more market-oriented reforms. It could also stall American efforts to reach potentially lucrative Chinese markets.

Responding to the potential crisis, U.S. trade officials are stepping up efforts to settle differences with the Chinese before they reaching the boiling point.

“The kind of trade policy criticisms we’ve heard about Japan will be carried over to China--mainly that (Chinese markets) are closed,” said Howard Krawitz, director of Chinese and Mongolian affairs for the office of the U.S. trade representative. “We’re not talking about denying the Chinese access to markets here. We want to open up the Chinese economy.”

While the U.S. government has sought more access to China’s markets, the Chinese have quietly but quickly penetrated American markets. Imports and exports between the two nations were virtually in balance in 1985. However, the deficit--the amount by which imports from China exceed U.S. exports to China--reached $3.5 billion by 1988 and has tripled since to $10.4 billion in 1990. The U.S. deficit with China--third behind that with Japan and Taiwan--is expected to surpass Taiwan’s this year.

The surge stems in part from China’s policies to boost exports to create foreign currency earnings needed for economic development. It also reflects China’s aggressive efforts to target the U.S. market.

Indeed, most shoes sold in the United States are made in China, as are about half the imported toys. Chinese exports of labor-intensive manufactured products such as stereo equipment, televisions and household appliances continue to rise. Its low wages have made China extremely competitive in consumer electronics industries.

Also, clothing exports--accounting for about one-quarter of U.S. purchases from China--have expanded as the Chinese begin to produce higher-quality clothing.

But many U.S. business leaders and trade analysts say the Chinese have “dumped” products such as silicon by selling them below cost. They also contend that the Chinese are skirting U.S. import quotas on apparel by secretly shipping goods through third countries such as Singapore, the Philippines, Mexico, Lebanon, Mozambique and Panama.

Meanwhile, the Chinese government is employing protectionist measures to deny or limit American access to Chinese markets, U.S. firms say. Many U.S. industries also accuse China of engaging in massive theft of American intellectual property, such as computer software, protected by copyrights.

For its part, the Chinese government denies running a trade surplus with the United States. Beijing instead contends that the dispute stems from differences in accounting. The U.S. government counts, as imports from China, goods that are shipped from that nation through third countries, while the Chinese count only goods that are shipped directly to America. Indeed, China says it registered a deficit of $1.46 billion in trade with the United States through the first 11 months of 1990.

While the U.S. government criticizes China for dumping, China responds with complaints about America’s “anti-dumping taxes”--surcharges that make some of its exports more expensive.

China denies claims that it is intentionally violating American import quotas. And it criticizes the U.S. government for barring the sale of certain high-technology items to China.

The trade dispute heated up further earlier this month when Joseph Massey, an assistant U.S. trade representative, warned that America may impose punitive tariffs on China unless it acts soon to restrict the piracy of software and other intellectual property protected by international copyright laws. China has no law forbidding copyright infringements.

Massey issued the warning during a visit to Beijing that was intended to encourage China to pledge by April 30 to adopt copyright laws soon. The tough talk prompted the International Intellectual Property Alliance, a Washington-based coalition of firms involved in publishing, films, recorded music and computer software, to ask the U.S. government to impose punitive tariffs on Chinese goods.

The value of U.S. property copied and resold in China is an estimated $418 million annually, said Eric Smith, the coalition’s lawyer. Some Chinese enterprises do nothing but pirate computer software, Smith said.

“The U.S. government has warned China on this issue for two years,” Smith said. “The namby-pamby approach isn’t working. It’s time to take action.”

Smith said the Chinese print millions of copies of new editions of some books--among them, an English-language instruction manual. Some Chinese publishers even distribute pirated copies of an autobiography by President Bush, he said. Software firms were the biggest losers, suffering nearly 75% of the pirated copyright losses.

Among those concerned is Lotus Development, a software maker based in Cambridge, Mass. It has offices in Hong Kong but makes little effort to sell in China.

“There’s no doubt that Lotus products are widely pirated,” said Neal Goldman, a Lotus lawyer. “China could be a major market for software companies, but there’s no reason to set up sales operations there as long as pirating continues.”

The Chinese government last year passed a copyright law that will take effect in June. However, the office of the U.S. trade representative says the law is inadequate because it protects only intellectual property that originates in China.

Meanwhile, the U.S. Commerce Department says it is trying to prevent China from engaging in unfair export practices. The agency intensified a separate trade issue late last year when it charged that China had exceeded its quota allotment for apparel and textile shipments to the United States. It accused the Chinese of trying to circumvent its import quotas by sending goods through other countries--a maneuver called “illegal trans-shipping.”

The Commerce Department estimates that China exceeded its 1990 apparel and textile quota by $85 million--and responded by reducing China’s 1991 quota by that amount. For example, Commerce contends that the Chinese exceeded the 1990 quota on cotton sweaters by 60%. For that reason, Commerce last month announced that China would be allowed to ship only 40% of its cotton sweater quota to the United States in 1991.

The “charge-back” penalties angered the Chinese government, which had recently issued provisions designed to guarantee compliance with textile quotas. Beijing contended that it should have been given a chance to investigate the problem, saying it has opposed illegal trans-shipments.

However, the charge-back penalty pleased the American Apparel Manufacturers Assn., said Carl Priestland, the trade group’s economist. Said Priestland: “Any kind of fraud should be eliminated, and this is fraud any way you slice it.”

About half the apparel sold in the United States is imported, and nearly 14% of the foreign half comes from China, Priestland said.

The association doesn’t oppose present import quota levels, but some apparel makers would like more access to Chinese markets, he said. The Chinese don’t want their foreign exchange used to buy imported apparel, he said.

Restricting the use of foreign exchange--currency the Chinese need to import--is just one way the Chinese government limits imports, said Kim Woodard, chief China analyst at A. T. Kearney, a Chicago-based management consultant. Woodard, based at Kearney’s Alexandria, Va., offices, said the Chinese also restrict and control incoming goods through import licensing and tariffs.

“The Chinese are running a trade surplus largely because they have put the squeeze on imports,” Woodard said. “It’s not discriminatory. The United States is suffering along with other countries interested in exporting to China.”

American exports to China actually declined--to $4.8 billion in 1990 from $5.7 billion in 1989. However, some Chinese officials blame the U.S. government for the decline, citing U.S. sanctions imposed after the 1989 Tian An Men Square massacre.

Still, Chinese officials contend that they made great efforts to expand imports from U.S. firms by sending a large delegation to America on a purchasing mission in October. Chinese officials say they may retaliate if the United States imposes punitive tariffs.

The posturing and threats increase the danger of a trade war, said Kenneth Lieberthal, a University of Michigan political science professor who returned from a trip to China earlier this month.

Lieberthal predicted that if trade relations don’t improve, the elimination of China’s most favored nation status is more likely, he said.

If China loses that status, it will lose much of its business with its most important market. Trade officials and others involved with China’s export sector are more market-oriented and have been pushing for reforms, and they will lose influence if exports are curbed, said David Denney, research director at the U.S.-China Business Council, a Washington-based group representing U.S. firms with business interests in China.

Said Denney: “It would be difficult to proceed with more free market reforms without trade with the United States.”

Staff Writer David Holley in Beijing contributed to this story.

U.S. trade deficit with China

1987: 2.796

1988: 3.490

1989: 6.235

1990: 10.417

U.S. Imports from China

1987: 6.293

1988: 8.511

1989: 11.990

1990: 15.224