China, says former U.S. Trade Representative Charlene Barshefsky, "is a tiger on steroids." So how do you live with the tiger? That question will become increasingly urgent as the Chinese-U.S. economic relationship deepens. Something has to be done to rein in ever-rising deficits without retreating from America's free-trade principles. Both sides have to give something. Here are suggested steps:
GET THE U.S. FINANCIAL HOUSE IN ORDER. Americans need to save much more so they aren't relying on foreign lending to fund the federal government and to satisfy their huge craving for imports. In the fiscal year just ended, the U.S. government ran up a $413 billion budget shortfall. The current account, the broadest measure of trade and investment and capital flows, is headed for a $620 billion deficit this year. That means foreigners are essentially lending America nearly $1.7 billion a day to support its lifestyle. Much of that shortfall is being covered by the governments of China, Japan, and other Asian countries in the form of purchases of U.S. Treasuries. Naturally it's increasingly difficult for Washington to bargain on tough trade issues when it is also going begging to its trading partners for one more loan.
TRY FRESH TACTICS ON THE YUAN. The U.S. has asked Beijing to let its undervalued currency strengthen and so reduce China's advantage in exports. China insists its banking system is too fragile to let the yuan float freely, as the U.S. advises. Nor will the U.S. get the 30% revaluation that some say would have a major impact on Chinese exports. But Washington could press for a substantial adjustment. Morris Goldstein and Nicholas R. Lardy of the Institute for International Economics suggest the yuan could trade 15% higher with no damage to China's banking system. That would be a start. It would also help persuade Japan and other Asian nations that are big contributors to the U.S. deficit to let their currencies rise. If China refuses? Take the issue to the World Trade Organization. Its rules prohibit countries from manipulating their currencies to secure a trade advantage.
ENFORCE TRADE LAW MORE AGGRESSIVELY. The U.S. relies far too much on anti-dumping suits filed by American companies to level the playing field. The process is costly for small companies in particular and takes years, by which time the damage is done because Chinese producers move so fast into markets. The U.S. Commerce Dept. can file suits on its own when it sees key industries under attack. Commerce used this tactic successfully with Japanese chipmakers in the 1980s. It could use it again, especially if China started to dump goods in key industries, such as auto parts, stainless steel, and specialty chemicals. The U.S. can also be more aggressive in seeking WTO action. China backed down, for example, from applying higher taxes on imported semiconductors after the U.S. threatened to take the issue to the WTO.
BEEF UP DEFENSE OF INTELLECTUAL PROPERTY. Software is something the U.S. should be exporting in huge volumes to China, one of the world's biggest growth markets for computers. Yet the U.S. business software alliance estimates that 92% of all software in Chinese computers is either unlicensed or pirated. That represents a loss to U.S. exporters of some $3.8 billion a year. Stolen software also helps subsidize Chinese engineering companies, machine toolmakers, and other industries that don't have to pay the licensing fees their U.S. competitors do. and it's not just software. Counterfeit pharmaceuticals and even fertilizers are joining the roster of pirated music CDs, books, movies, and video games. Beijing has brought some high-profile criminal cases. But in general it emphasizes small civil penalties that pirates shrug off. The U.S. until now has mainly jawboned China to do better. But Washington could bring the issue to the WTO and could seek sanctions for future violations.
REOPEN THE WTO DEAL. When the agreement to let China into the WTO was negotiated, China was allowed to continue to protect certain strategic industries under the rationale that it was a developing nation. Even though China is lowering tariffs, duties remain high by global standards in some industries. Foreign companies are still compelled to manufacture locally and form joint ventures in cars, telecom, and construction and engineering services -- areas where America could be exporting.
Beijing has been able to restrict the right of foreign companies to distribute within China on their own and is resisting opening up government contracts to foreign bidding. But China is growing up quickly and no longer needs these protections to stand on its feet. The U.S. has leverage as well. China is eager to have its "nonmarket economy" status upgraded. For complex reasons, that would make it easier for China to defend itself against anti-dumping cases. The U.S. could back that upgrade in status in return for a renegotiated WTO deal.
By Paul Magnusson