Free-Trade Issues Top Agenda for U.S.-China Meeting

China’s recent moves to restrict imports and increase foreign sales have put that giant Asian nation on a collision course with the United States, an issue expected to dominate this week’s annual meeting of a top U.S. and China trade commission in Washington.

In a meeting today with China’s Minister of Foreign Trade and Economic Cooperation, Shi Guangsheng, U.S. Commerce Secretary Bill Daley vowed to push for greater access to the Chinese market, including the reversal of newly imposed trade and investment restrictions in nine sectors including insurance, telecommunications and agriculture.

Daley said Wednesday these market-closing measures are aggravating the already explosive U.S.-China trade imbalance, which is expected to climb to a record $60 billion this year, a nearly 30-fold increase since 1986. The Commerce secretary also said China’s backsliding on its commitments to free trade is jeopardizing its campaign to join the World Trade Organization.

WTO membership would significantly boost China’s credibility and give it greater access to the trade benefits and legal protections offered by the Geneva-based global trading regime.

“Closing off sectors to imports and investment does not bode well for China’s interest in acceding to the WTO,” Daley told reporters Wednesday.

But given the increasingly defensive posture on both sides, China watchers do not expect any substantial results from this week’s two-day meeting of the U.S.-China Joint Commission on Commerce and Trade.

“There’s little hope anything will change in the short term,” said Greg Mastel, a vice president at the Economic Strategy Institute, a Washington think tank. “The Chinese are distracted by domestic economic problems and not willing to talk about trade liberalization right now.”

In a speech earlier this week, Undersecretary of Commerce David Aaron said trade is on the verge of becoming the “most disturbing” issue in the U.S.-China relationship, upstaging human rights and security concerns. That represents a dramatic turnaround from a few years back, when U.S. firms eyeing the potentially lucrative China market were that country’s fiercest allies in Washington. Instead, China today has eclipsed Japan as the United States’ most contentious trade partner.

To add to the tension, a U.S. congressional committee is reportedly wrapping up its investigation into charges that U.S. aerospace companies provided sensitive military technology to China.

The deteriorating U.S.-China trade relationship is just one of many thorny issues facing the Clinton administration as its trade liberalization efforts are overwhelmed by the more immediate demands of global economic damage control and impeachment politics.

It also highlights the difficult choices facing both the U.S. and China as their governments struggle to balance complex pressures at home against the sometimes contradictory needs of an increasingly fragile global economy.

“China is vigorously defending its own interests in trade, no matter what the cost to its trading partners,” Mastel said.

China’s leaders are determined to maintain an 8% growth rate in the face of a severe regional downturn, fearful that a domestic contraction would trigger serious political and social instability among its 1.2 billion people.

When the Thai baht collapsed in July 1997, triggering a meltdown of Asian currencies and stock markets, China’s decision not to devalue its currency, the yuan, was widely applauded as critical to global stability.

As a result, however, Chinese firms have lost their competitive edge to Asian neighbors whose currency has devalued as much as 80%, sharply lowering their production costs. Over the last four months, China’s exports have fallen an average of 11%, and imports have plummeted even further.

The Chinese argue that pressure from the United States and others not to devalue their currency has forced them to find other ways to protect their domestic companies from stepped-up competition at home and abroad.

Those measures include “buy local” campaigns, restrictions on imports of high-tech products and power equipment and an increase in export subsidies.

Indeed, U.S. pressures on China to maintain the yuan’s strength and to continue opening its borders are contradictory, according to Nicholas Lardy, a China specialist at the Washington-based Brookings Institution.

“It was perfectly predictable, given all the other changes, that China was going to have to do something else, and the something else is more and more protectionist measures,” he said.

Lardy argues that Asia’s economies have stabilized enough to withstand a small devaluation of the Chinese currency, which would ease the pressure on the government to close off its economy. By giving China room to devalue, the U.S. would also gain leverage to push China harder on market-opening measures.

A far more worrisome question is whether China’s Communist leaders, faced with the specter of a regional meltdown that would bankrupt and impoverish tens of millions, are losing their enthusiasm for the free-market economics they had embraced with fervor over the last decade.

Lardy said it is too soon to know whether China’s more protectionist stance represents short-term damage control or is a more significant rethinking of the government’s move away from a centrally controlled economy.

“I don’t think we’ll have a definite answer until we see the light at the end of the Asian tunnel and see how they respond,” he said.