Tough Talk, Brisk Trade
Over the last month, China and the United States have been sparring like two heavyweights.
After the Bush administration imposed quotas on Chinese-made bras, nightgowns and knit fabrics, China promptly reprimanded the U.S. ambassador and canceled trips to buy American soybeans, cotton and other farm goods. Beijing threatened to retaliate because of U.S. tariffs on imported steel. Then Washington accused China of dumping color televisions in the U.S.
The exchanges prompted worries that the two giant economies may be heading for a trade war. But throughout all the diplomatic turbulence, the Chinese quietly kept buying U.S. farm products at a brisk pace. In fact, China was the biggest purchaser of U.S. soybeans and cotton last week, according to the latest U.S. Agriculture Department report.
The disparity between the public conflict and the private deal-making points to one inescapable fact: The rapidly growing U.S.-China trade has a powerful momentum of its own. And that increased economic interdependency makes it difficult for politicians on either side of the Pacific to lash out without inflicting significant harm back home.
That point was underscored Thursday when the Bush administration rescinded its controversial steel tariffs almost 16 months early, after they were declared illegal by the World Trade Organization.
Trade relations will be a likely topic of discussion when Chinese Premier Wen Jiabao meets with President Bush on Tuesday. Also expected to be on the agenda are other issues of shared concern such as the growing tensions across the Taiwan Strait and the North Korean nuclear threat.
Relations between the two nations are particularly important for trade-dependent states such as California, which has benefited from China’s growing appetite for goods ranging from electronics to raw materials. China is the world’s largest buyer of U.S. cotton, for example, and California is one of the leading exporters.
“With China roughly using one-third of the world’s crop in its textile mills, they are kind of the Wal-Mart of the cotton consumption business,” said Mark Bagby, a spokesman for Calcot Ltd., a Bakersfield cotton cooperative that handles about 44% of the state’s crop.
The strength of the bilateral relationship is one reason China has responded to the Bush administration’s textile and television measures so carefully, issuing public denunciations but launching no serious retaliation in response, according to China experts.
The Chinese “want to establish their credibility but do not want to escalate tensions,” said Kenneth Lieberthal, a China expert at the University of Michigan and former Asia specialist with the Clinton administration. “It’s a hard posture to assume.”
Experts warn that the potential still exists for economic conflicts between the two nations to spiral out of control, given the sensitive issue of U.S. job losses on the presidential campaign trail. China has been the chief target of complaints from hard-hit U.S. manufacturers, which have lost 2.7 million jobs in the last three years. And several bills pending in Congress would penalize Beijing unless it takes steps to reduce its exploding trade surplus with the U.S., which could reach $120 billion this year.
Frank Vargo, director of international affairs for the National Assn. of Manufacturers, said his group’s chief priority is convincing China to revalue its currency. U.S. manufacturers contend that the yuan, which is tied to the U.S. dollar, is undervalued by as much as 40%, making China’s exports artificially cheap. If Premier Wen doesn’t commit to addressing the currency issue, NAM and other groups are prepared to file a trade complaint against China.
“What we would like to see come out of Wen’s visit is an understanding on China’s part that there is a problem we both need to work on solving,” Vargo said.
For China, which depends on its export factories to create jobs for its 1.3 billion people, access to the United States -- its largest foreign market -- is crucial.
Likewise, for an increasing number of U.S. farmers, manufacturers and service providers, China represents the market of the future, with its huge appetite for raw materials, sophisticated components and managerial expertise and other services.
China already is America’s fastest-growing overseas market, and U.S. exports to China have grown by double digits annually in the last several years, with sharp increases in sales of aircraft, fertilizers and chemicals. China now is California’s fourth-largest export market, this year having surpassed South Korea.
Through its sheer size, China is a market mover. For example, in the week after China’s cancellation of its soybean buying mission, prices for that commodity dropped by as much as 6%.
U.S. farmers export more than half of their production of soybeans and soybean-based products, and China is by far the leading purchaser, in spite of a continuing dispute over Chinese quarantine restrictions.
“There are two things that move the Chicago Board of Trade: weather and China,” said Peter Thornton, the Asia marketing manager for the American Soybean Assn., the St. Louis-based trade group that is hosting the Chinese visit.
Trade tensions also have been costly for the California cotton industry, the nation’s second-largest producer of cotton. California growers, which are centered in the San Joaquin Valley, specialize in a higher-quality cotton, and 85% of the state’s crop is exported.
After China put a hold on its cotton buying trip, cotton prices sank from an 8-year-old high of 85 cents a pound to nearly 70 cents before recovering slightly this week.
China, the world’s leading apparel and textile producer, has purchased cotton from African and South Asian countries. But the fast-growing Asian country can’t stay out of the U.S. market for long because it has such a huge demand for raw materials to feed its textile mills, said Keth Henley, director of Cotlook Ltd., an international cotton news service based in Liverpool, England.
So far this year, China has bought 2.9 million bales of cotton, up from 600,000 it had purchased by this time last year.
“China needs cotton,” Henley said. “It could be that they would react to a negative announcement by the U.S. by saying, ‘Well, we’re not going to buy right now.’ But the Chinese are great capitalists. They understand the law of supply and demand, and it wouldn’t behoove them to wait too long.”
