The Hindu Business Line : Prodding China to be responsible trade partner

The one big issue on the table is the trade deficit. In 2006, the US deficit with China rose to $233 billion, its largest imbalance ever recorded with a single trading partner.

My Chinese student was very definite about what guides her buying decision. "I don't buy things made in Japan," she said. "They treated China very badly historically." She was referring to the atrocities committed by Japanese soldiers in China before and during the Second World War.

Fortunately for China, not many people around the world use history and politics to make their buying decisions, so China continues to build up enormous exchange reserves from its booming exports. Even bilateral trade with Japan is doing well and Japanese companies continue with their expansion plans in China.

Some bad press

Elsewhere, China's actions are coming under scrutiny. Its growing influence in Africa has been receiving a lot of bad press in the US. Many human rights activists, for example, are upset that the Chinese are not using their muscle to get the Sudanese Government to resolve the conflict in the Darfur region. Chinese projects in Kenya, Ethiopia and Nigeria have come under attack from locals, resulting in several deaths.

More recently, the news has also not been very good for some US importers of Chinese goods. In the last few weeks, two products have been found to have been contaminated. The Food and Drug Administration of the US Government issued a warning that a poisonous chemical, diethylene glycol, was discovered in toothpaste imported from China. This is used in solvents and the anti-freeze used in cars. The Chinese company supplies this toothpaste to other countries also, such as Australia and Panama.

This follows another scare during May when the deaths of dogs and cats was said to have been caused by another industrial chemical, melamine, normally used in plastics and fire retardants, found in wheat flour imported from China and used in the manufacture of pet foods. Chinese cough syrup is said to have killed about 100 people in Panama last year.

On its part, the Chinese Government is trying to send a strong message to its people on how it will deal with these issues. A former head of China's Food and Drug Administration was sentenced to death last month by a court for receiving bribes from pharmaceutical companies, resulting in poor supervision, during his tenure at the watchdog agency. The death sentence for corruption may seem severe but it is not unusual in China. The Government also announced that it was setting up a system to recall food items on safety concerns.

For China, it is not just a matter of its trade relations and reputation being hurt. Its own people have suffered in the past from contaminated pharmaceutical and food products due to corruption and lax regulations.

US-China dance

The US' dealings with China on these and other issues have proved to be quite a diplomatic challenge. In the years before China joined the World Trade Organisation, there would be an annual ritual around the time the US would have to renew China's Most Favoured Nation status. This dance would usually begin with US policy-makers listing out their agenda and the various concessions they wanted from China.

China would then arrest a prominent dissident within the country. Human rights advocates in the US would get upset and pressure their Government to do something about it. Senators and Congressmen (that is, parliamentarians) would issue statements demanding the release of the dissident.

A few days before the two sides met, China would release the dissident in response to US requests. Having spent its political capital, the US would have no card left to seek other concessions and China would get its renewal without any changes!

Changes to the tango

This tango has changed a bit now. The advantage with the US is its distributed political structure dealing with a unitary political structure in China. So, even though the US administration may strike a deal with the Chinese Government, the US Congress may be independently crafting legislation that can hurt the Chinese economy.

Thus, for example, the US Treasury can pressure the Chinese to do something about the trade imbalance by using the fact that Congress is otherwise planning legislation to set stringent conditions on US-China trade. If China gives a little, Congress would be convinced that progress is being made! One piece of legislation, tabled last year, threatens to impose 27.5 per cent tariffs on imports from China.

The relative strengths of the two economies and their negotiating powers were seen recently when the Chinese Vice-Premier, Ms Wu Yi, visited Washington in May. This was the second Strategic Economic Dialogue that began last year and is to be an annual feature, to focus on long-term economic issues.

The one big issue on the table is the trade deficit. In 2006, the US deficit with China rose to $233 billion (about Rs 10 lakh crore), its largest imbalance ever recorded with a single trading partner. One long-term issue that the US has been pushing to resolve this is to loosen the Chinese control on the yuan-dollar exchange rate. Some economists estimate that the yuan is about 40 per cent undervalued against the dollar.

Whether any long-term issues were resolved I do not know, but the announcements after the meeting suggested that some minor issues had been dealt with. Some new air routes were approved, and China agreed to more access for US financial services firms. Also, does one read any significance to the fact that last year the Chinese side was headed by their Premier, but this time, it was a Vice-Premier who made the trek to Washington?

Piecemeal Chinese response

China has been responding to US demands in a piecemeal fashion. Rather than let its yuan appreciate against the dollar, it has allowed a small band within which it would fluctuate, and has preferred to deal with specific goods to narrow the trade deficit with the US. It recently levied duties ranging between 5 per cent and 10 per cent on various types of steel being exported to the US.

US-China-Japan ties

While individuals like my student may have their own compunctions about where they buy their stuff from, the economies of Japan, China and the US are getting more and more closely intertwined. Japan is the leading supplier of imports into China (15 per cent) and the same is true for Japan also (21 per cent of imports accounted for by China). While the US is the largest export market for China (21 per cent of its exports), it still has a long way to go to improve its purchases from the US.

The Economist Intelligence Unit figures that by 2020, China will narrowly outstrip the US in GDP (calculated by PPP rates which corrects for price differences in the respective economies). Meanwhile, the Chinese have the world's largest current account surplus (about 9 per cent of their GDP) generated by healthy trade. The US has also seen benefits. Cheap imports from China have helped keep US inflation under control. The Chinese are also carrying a lot of dollars from their trade surplus with the US and in turn have invested it in US Treasury bills, holding about 20 per cent of all foreign debt of the US and helping limit US interest rates. The dancing partners are getting closer.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. He can be reached at cgopinat@suffolk.edu)

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