U.S.-China talks to look at trade tensions

Times Staff Writer

A high-powered team of U.S. officials arrived Wednesday in Beijing to push China to further open its markets and fight piracy, but analysts questioned whether the Asian trading giant could grant major concessions.

Treasury Secretary Henry M. Paulson Jr., accompanied by Federal Reserve Chairman Ben S. Bernanke and six other Bush Cabinet members, is meeting today and Friday with Vice Premier Wu Yi and senior Chinese leaders to discuss economic tensions between the two nations. The meeting has been heralded as the biggest economic summit between the two powers.

The talks come on the five-year anniversary of China's entry into the World Trade Organization and as U.S. officials are facing a record trade deficit with China. Analysts say Chinese leaders are worried that American public opinion toward China could sour and spur tougher action by the new Democratic-controlled Congress.

Expectations are high that China will relent to key U.S. demands, in large part because of the high-level delegation led by Paulson, a former chief of Goldman Sachs and an old China hand. Chinese analysts say Beijing is most likely to offer a package of "deliverables," if only to save face for the Bush team. That could include greater access by foreign investors to China's financial markets, better enforcement of copyright protections and possibly another round of big-ticket purchases of American goods.

But the two-day meeting isn't likely to secure what many in Washington want: a sharp step-up in the value of China's currency.

"For China, although it will do its best to give ground, the most it can do will be no more than some rear-guard actions, far below the expectation of the U.S.," said Shi Yinhong, director of the center for American Studies at People's University in Beijing.

Chinese leaders have started to make very gradual changes, fearing that dramatic shifts could lead to job losses and destabilization of their economy, now the fourth largest in the world.

"The U.S. understands China's situation too ... so it will quit when it is ahead," Shi said.

Although that remains to be seen, Paulson, who has made dozens of trips to China over the last decade, has sought to lower expectations in public comments in recent days. He has indicated that this meeting, the first in the so-called strategic economic dialogue between the two nations, will allow the U.S. to begin to address a range of key issues involving China and its increasingly influential role in the world, including trade, energy and environmental protection.

Members of Congress have repeatedly threatened to slap hefty tariffs on Chinese imports unless Beijing significantly strengthens the yuan. An artificially undervalued yuan, they say, has made Chinese goods cheaper in overseas markets and inflated China's trade surplus with the U.S., which this year is on track to exceed last year's record of $201.5 billion.

In asking Bernanke to join him -- the Fed chairman will also make a speech Friday to a group of scholars -- Paulson has sought to convey the significance of the currency issue to the Chinese. But U.S. business groups say China's exports have saved American consumers money and allowed U.S. corporations to operate with lower overhead.

Analysts say that if a change in currency severely weakens China's economy, as some fear, the Asian nation could reduce its demand for American goods and sharply cut back on its purchases of U.S. Treasury securities, which it buys with dollars earned from exports to the United States. Those purchases have helped hold down U.S. long-term interest rates, which keeps mortgage rates low for American homeowners.

"Americans are enjoying the benefits from trading with China every single day," said Mei Xinyu, a researcher at the Ministry of Commerce.

How will China probably respond to this latest push on the currency? In a familiar manner, said James Zimmerman, chairman-elect of the American Chamber of Commerce in China. "No direct action will result for this visit and China will move in a direction and at a time that is in the best interest of China."

He said the chamber had not urged the U.S. delegation to focus on any particular area but had encouraged the group to stress the need for transparency and uniformity in the application of Chinese law.

China's currency policy drives its trade performance and investment boom, which supports jobs and economic development, said Donald Straszheim, vice chairman and China specialist at Roth Capital Partners in Newport Beach.

"I think we have little leverage directly with China," he said. "Most important, they are convinced they have a winning game."

The Bush administration, though, this week issued a critical report to Congress about China's "decidedly mixed" record of compliance with WTO obligations, and made it clear that Washington would file formal complaints with the trade body if dialogue failed. The report, by U.S. Trade Representative Susan C. Schwab, who is part of the delegation, criticized China for restricting market access by foreign banks and for failing to crack down effectively on the counterfeiting of goods, among other things.

Chinese officials, meanwhile, marked the five-year anniversary with speeches that defended the nation's WTO record and highlighted how the nation had lowered tariffs and opened its markets. But Beijing also has moved to protect some industries, such as media and energy, from foreign competition.

"Before China entered the WTO, Chinese scholars had profound worries about many [domestic] industries being adversely affected, but in fact it turned out that the U.S. and EU are the ones worrying about whether their industries can undertake challenges from China," said Shi at People's University.

The current trade imbalance is "deep and wide," he added. "We can take more initiatives and make some concessions.... But still, such changes can't be too fast and will be slower than America's expectations."

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don.lee@latimes.com

Cao Jun of The Times' Shanghai Bureau contributed to this report.

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