Beijing Bolsters the Barriers

When Beijing announced its $586 billion economic stimulus plan earlier this year, optimists hoped it might help the U.S. address a nagging problem: its staggering trade deficit with China. With the Chinese economy growing more briskly once more, the reasoning went, mainland companies would suck in lots of U.S. machinery and technology just as financially strapped American consumers bought fewer Chinese DVD players, sneakers, and the like.

Those hopes may have been overblown. Though the U.S. trade deficit has slimmed, Beijing has recently introduced a host of policies aimed at boosting exports while making it harder for foreign companies to sell in the mainland. China has renewed steps that keep its currency undervalued against the dollar, reinstated tax breaks on exports, and told government entities to buy Chinese products. With efforts to boost domestic consumption flagging, Beijing remains reliant on the "narcotic" of export-led growth, says former U.S. Trade Representative Susan C. Schwab. "Accumulating surpluses makes [China] feel strong and powerful."

On June 23, Washington filed a complaint with the World Trade Organization alleging that Beijing has reserved key raw materials such as magnesium and zinc for its own companies. U.S. and European experts say that gives Chinese industry an advantage over foreign manufacturers who need those materials too.

Lots of smoke, to be sure. But that doesn't mean a trade war is imminent. While many of Beijing's policies spark anger in the U.S., Washington has few clear remedies. It can file cases at the WTO on issues it believes it can win and crank up diplomatic pressure on Beijing. But many "protectionist" measures decried by American trade hawks are acceptable under WTO rules. For instance, Beijing never signed a WTO agreement on government purchases when it joined the trade body in 2001. Likewise, Beijing's moves to exempt many exports from a 17% value-added tax would seem to comply with WTO rules and are similar to policies in Europe and elsewhere. Essentially, China is restoring old tax breaks it revoked a few years ago, says China expert Nicholas R. Lardy of the Peterson Institute for International Economics in Washington.

No "Leg to Stand On"

The U.S. may have a more solid case regarding Chinese efforts to restrict sales of scarce minerals. The fact that Chinese companies can buy these materials while foreigners can't violates WTO rules, U.S. and European experts say. There is a good chance Beijing will back down on this issue "because they don't have a leg to stand on," says Lardy.

Whether or not Beijing is within its rights, the appearance of protectionism is likely to fuel pressure for retaliation. Before 2007, China enjoyed trade surpluses with the U.S. but had a deficit with other countries. By last year, China's surplus with the entire world had passed $400 billion, notes University of Maryland Robert H. Smith School of Business economist Peter Morici. And with the yuan still undervalued against the dollar by at least 20%, the U.S. deficit could start ballooning when Americans start buying again. "We cannot grow with the kind of trade deficit we have with China," Morici predicts. "And we'll continue to have that trade deficit as long as China keeps changing the rules." The policy dilemma for Washington, meanwhile, will only grow more wrenching.

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