No More Mr. Nice Guy With China?

Washington is likely to step up pressure on Beijing to revalue its currency

Ever since the terrorist strikes of September 11, 2001, the Bush Administration has stressed cooperation, not confrontation, in its dealings with China. Eager to secure Beijing's help in combatting terrorism and trying to defuse the nuclear threat posed by North Korea, the Administration played down concerns over China's mercantilist policies and its ballooning trade surplus with the U.S.

That may be about to change. Infused by a new lineup of officials at the Treasury and State Depts. and facing mounting pressure from Congress and Wall Street over the soaring global trade deficit, the Bush team is taking a fresh look at U.S. relations with China. What's likely to emerge, some officials say, is a more aggressive approach toward the Asian giant that places a higher premium on righting the lopsided trading ties between the two countries. Among the possible options: stepped-up pressure on Beijing, both bilaterally and multilaterally, to let its undervalued currency rise, and increased use of U.S. trade laws to counter damaging increases in imports from China. The Administration already took a step down that path on Apr. 3, when it launched an investigation into whether to re-impose quotas on surging imports of Chinese clothing following the end of a global textile pact last year.

To be sure, no one is talking about a return to the early days of the Bush Administration, when the President called China a "strategic competitor" and the two countries were at loggerheads after a U.S. reconnaissance plane collided with a Chinese fighter jet sent to intercept it. Indeed, Washington and Beijing agreed on Apr. 13 to the formation of a global issues forum to try to coordinate their efforts in a wide range of areas from the environment to infectious diseases.

Administration officials admit they have limited leverage in pushing China on the currency and trade fronts, given how interdependent the two countries' economies have become. "It's tricky," says one senior official. "They do hold $200 billion of our Treasury bonds." There's also the risk that aggressive action against China could backfire and lead to an escalating economic dispute. Responding to Congressional calls that Beijing revalue its currency, Chinese Foreign Ministry spokesman Qin Gang told reporters on Apr. 7 that the U.S. should look at correcting its own policies, including its big budget deficit, if it wants to narrow its global trade gap. And in what some U.S. officials see as a snub, China decided against sending its senior economic officials to the Apr. 16-17 meeting of the International Monetary Fund and World Bank in Washington.

But that hasn't stopped some in the Administration from thinking that it may be time for a different approach. After all, they say, it's not clear that the strategy of cozying up to China has yielded much in the way of benefits. During the 2004 Presidential election campaign election, the Bush team eschewed tough anti-China rhetoric even though that would have played well in such key swing states as Ohio and Michigan. The aim: to give China time to prepare its economy and financial system for a change in its rigid currency peg.

Yet the election has come and gone and the U.S. has yet to see the payoff from its go-easy approach that some in the Bush camp hoped for. Despite two years of quiet economic diplomacy by Treasury, Beijing shows scant signs of acceding to the substantial revaluation of its currency that many experts reckon is needed to rein in its bulging trade surplus with the U.S., which rose 30% in 2004, to $162 billion.

At the same time, China has not made the sort of progress U.S. State Dept. officials hoped for in dealings with North Korea. Combine that with recent saber-rattling by China over Taiwan -- it passed a law last month authorizing an attack should Taipei declare independence -- and the communist nation's continued double-digit increases in defense spending, and Washington has less reason to overlook its trade disputes with Beijing.

EXTERNAL PRESSURES

New personnel could make the difference in deciding what the U.S. stresses in its relations with China and how it goes about achieving its aims. Officials say the accession of former U.S. Trade Representative Robert B. Zoellick to the No. 2 post at the State Dept. ensures that economic issues won't get short shrift there. While not known as a hard-liner, "there's never been a Deputy Secretary of State with the knowledge of trade that he has," says National Association of Manufacturers Vice-President Frank Vargo.

At the Treasury Dept., former Bush campaign official Tim Adams is also expected to take a tougher line toward China and its currency peg than did his predecessor, outgoing Under Secretary for International Affairs John B. Taylor. "He's much more hawkish on China," says a former U.S. official who knows both men. "He also has a different style." Adams has more of a background in financial markets from his days as a market consultant than the academic Taylor. And he has closer ties to the White House, which could give him added clout within the Administration.

External pressures also argue for a tougher U.S. approach. So far, America's skyrocketing trade deficit with China and the rest of world has not caused any disruptions in the world financial markets. But the bigger the global gap gets -- it rose 25% to a record $617 billion last year -- the greater the risks. That was the message U.S. investors delivered to George W. Bush's National Economic Council Director Allan B. Hubbard at a private meeting earlier this year. The investors, including some top hedge funds, urged the Administration to act quickly to reduce the U.S. trade deficit, particularly with China, or risk a debilitating dollar collapse.

"SEA CHANGE"

Congress, too, is agitating for a tougher stance. On Apr. 6, the Senate, by a 67-33 margin, took China to task for using its cheap currency to fuel exports by refusing to kill a proposal to slap huge import tariffs on Chinese goods if Beijing didn't adjust its exchange rate. Analysts say the bill, which is vigorously opposed by the Administration, is highly unlikely to become law. But, as Senator Lindsey O. Graham (R-S.C.), co-sponsor of the bill notes, the vote shows "a sea change in the way the Senate looks at China." Adds Charles E. Schumer (D.-N.Y.), Graham's co-sponsor of the bill: "This is a shot across the bow not only to China, but to the Administration."

The Bush team is listening. Given the increasing irritation in Congress and the swelling trade deficit with China, the Administration team may have little choice but to ratchet up its pressure on Beijing and hope for the best.

By Rich Miller and Stan Crock, with Paul Magnusson in Washington and Dexter Roberts in Beijing

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