U.S. pleas unlikely to sway China in high-level talks

Reporting from Washington — 

As the United States opens top-level talks with China on Monday, the Obama administration will try to persuade Beijing to revalue its currency and back away from a policy of promoting Chinese innovation at the expense of foreign firms operating there.

The two issues are seen as a critical part of Obama’s goal of reshaping the U.S.-China relationship — and the global economy — on a more sustainable and balanced basis. But Washington’s plea probably will fall on deaf ears, its arguments undercut by the recent events in Europe as well as the legal and political realities of the day.

“They’re likely to issue some joint statements with the usual platitudes, but I’m not expecting any substantive deliverables,” said Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington.

During the two-day U.S.-China Strategic and Economic Dialogue in Beijing, both sides also are expected to discuss security issues in Iran and North Korea.

Treasury Secretary Timothy F. Geithner, who with Secretary of State Hillary Rodham Clinton is leading a team of 200 U.S. officials to China, has been saying for weeks that he expects Beijing to let its currency appreciate, something many believe will boost U.S. exports and create more jobs.

Geithner postponed the release of a report due April15 on whether China is a “currency manipulator,” a determination that could lead to economic sanctions. In doing so, he suggested that Chinese officials were likely to move on the currency issue soon, and analysts figured they would probably act by the end of June.

But that was before the debt problems in Greece escalated into a full-blown European crisis, sending the euro down further and threatening the global economic recovery.

The euro has fallen about 20% against the U.S. dollar in the last six months. And with Beijing pegging the value of its currency to the dollar, that’s meant a corresponding sharp rise in the Chinese yuan against the euro and other European currencies.

The upshot is that Chinese goods, like American products, are now much more expensive in European markets, China’s top export destination. Analysts on both sides said that Beijing leaders won’t be in any hurry to make changes that they fear could further hamper exports and hurt economic growth and employment for millions of its citizens.

“One of the messages the Chinese will be delivering to America is, ‘Look, we have to do what we can to protect ourselves from this potentially emerging crisis,’” said Donald Straszheim, head of China research at the International Strategy and Investment Group. “That takes precedence over any kind of bilateral steps.”

China’s party line has long been that it wants greater currency flexibility, but on its own timetable. And before the European crisis more Chinese policymakers were calling for a currency shift, in part to fight inflation at home, because a stronger yuan would make imports cheaper and thus help to hold down prices.

Geithner and his lieutenants have appealed to Beijing’s self-interest to raise the yuan and gradually let it fluctuate freely in response to market forces, arguing that would help China build a stronger domestic economy less reliant on selling goods to the U.S. and other nations.

“I think what’s happening in Europe reinforces the imperative that China move quickly to promote homegrown, consumption-led growth in its own economy,” said David Loevinger, the Treasury Department’s senior coordinator on China affairs.

In a briefing Wednesday, Loevinger insisted that the problems in Europe hadn’t changed Geithner’s approach on the yuan. “We’ve been very clear with the Chinese that this remains a top priority.”

Analysts in China responded coolly to those statements.

“That shows U.S. officials don’t understand China or the financial markets at all,” said Yi Xianrong, an international finance specialist at the Chinese Academy of Social Sciences in Beijing.

The European crisis, he said, was “caused by a lack of confidence in the market. A stronger [yuan] will only dampen all the efforts to rebuild confidence.… Keeping the exchange rate stable is key to recovery. The U.S. government should not try to keep pressing China on this.”

If U.S. officials come away from the talks empty, American lawmakers and manufacturers are likely to sharpen their calls for tariffs and other tough measures to pressure the Chinese.

Although U.S. manufacturing is recovering, with factory production and payrolls rising again, double-digit unemployment prevails over many industrial cities.

The U.S. trade shortfall with China eased last year with the recession, but still ran $227 billion, accounting for about 44% of the total U.S. deficit in goods.

“We’re starting to come back up, but the constant threat of China is hanging over us,” said Craig Miller, president of Stainless Steel Fabricators Inc., a La Mirada manufacturer of stainless steel equipment for the food and restaurant industries.

Miller said his beef with China wasn’t so much the currency, or even labor, which he said makes up just 10% of his overall costs. The problem, he said, was other subsidies China gives its export businesses, which Miller said gave them a 30% cost advantage over his 80-worker company, according to breakdowns provided by a large industry customer.

“I just want a fair playing field,” he said. “If I have to pay for rent, I’d like to see them do it. If I have to pay for light bills, I’d like to see them do that.”

Many U.S. executives and analysts long have argued that China’s industrial practices are far more significant in regards to trade than exchange rates.

In fact, China’s currency policy hardly registers at all among complaints by American corporations that are operating in China. For many of them, the biggest concern in recent months has been Beijing’s “indigenous innovation” program.

The measure is ostensibly aimed at promoting Chinese technological development, but outraged American and other foreign companies fear the policy will shut them out of government procurement markets because preferential treatment would be given to goods that get “indigenous innovation” accreditation.

What’s more, American businesses in China see the policy as part of a broader, more aggressive effort by Beijing and local governments to boost “national champion” companies and replace foreign technology with a domestic version.

U.S. trade officials have voiced their concerns about the indigenous innovation policy as well.

“That’s going to be an important part of our discussions,” said the Treasury Department’s Loevinger.

But as Lardy observed, U.S. officials won’t have strong legal standing to make their case with the Chinese, something Washington has acknowledged.

In its April 12 report on foreign trade barriers, the U.S. trade representative’s office said China “may maintain these measures” until it completes its negotiations and adopts the World Trade Organization’s government procurement agreement. Analysts said Beijing is not obligated to join WTO’s pact.

“Realistically, what can you expect?” Lardy said. “Quite frequently, China doesn’t move on these [kinds of] issues until they’re filed [with an international body]. And in this case, the USTR has already said

we’re never going to take a case on this because it’s not illegal.”

don.lee@latimes.com

Tommy Yang in the Times’ Beijing bureau contributed to this report.