Deficit Strains China Ties

The U.S. trade deficit with China continues to drive tensions, despite a decline last year.
By Michael Lelyveld
currency-305.jpg Chinese 100 yuan notes shown alongside a U.S. $100 dollar bill in Beijing, Oct. 14, 2004.

BOSTON—The U.S. trade deficit with China has declined for the first time in eight years, but experts expect little change in debates over Beijing's controversial currency policy.

In 2009, the trade gap with China fell to U.S. $226.8 billion from a record $268 billion a year before, but the improvement was the result of the recession rather than any shift in China's policies, economists say.

"It's the weaker economy," said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington, noting a 12 percent drop in imports from China and a 45 percent cut in the U.S. trade deficit with the world.

"China was just part of the larger story," Hufbauer told Radio Free Asia.

"U.S. imports drop pretty fast when we have a recession because our imports are dominated by consumer goods," he said. "Consumers tighten their belts when things get tough, and things did get tough last year."

The imbalance with China has been rising steadily since 2001, the last year it declined, leading to charges that the country takes unfair advantage by undervaluing its currency to make exports cheaper abroad.

U.S. manufacturers have pushed a wave of trade complaints against China over the past year on products ranging from tires to paper to steel pipes.

Twenty years ago, the annual trade deficit stood at only U.S. $10 billion. It has more than tripled over the past decade, according to U.S. Census Bureau figures.

Critics have argued for years that China deliberately undervalues the yuan by 25 to 40 percent, costing the U.S. economy business and jobs while driving deficits higher.

Under pressure, China adopted a more flexible currency policy in July 2005, allowing the yuan to rise by 17 percent since then. But it has kept the value unchanged over the past year, citing threats to its own economy.

Trade relations

Hufbauer said it is a close call whether Washington will step up pressure on China over trade and monetary issues this year, given the list of frictions between the two countries on matters ranging from Taiwan and Tibet to climate change, computer hacking and Iran.

Widening conflicts could lead critics in Congress to push harder on trade and economic issues, arguing that China is not cooperating in any key policy areas. The flip side is that more pressure could aggravate disputes.

"From a policy standpoint, my guess is that 2010 will be a rough year in U.S.-China trade relations, partly because of the deficit, partly because of unemployment here, and partly because it doesn't seem that the two giants are playing ball on a lot of geopolitical issues," Hufbauer said.

"There seems to be less reason to keep the lid on trade frictions," he said.

Patricia Mears, director of international commercial affairs at the National Association of Manufacturers in Washington, agrees that the temporary narrowing of the deficit will not reduce pressure for policy changes in China.

"I think that there's not enough of a lessening of the deficit," said Mears. "By far, our deficit is still largest with China."

"It's a good trend, but I don't think it's enough, frankly, to have the administration or members of Congress who are concerned about this say we're on the right track," she said.

Last year, the goods deficit with China represented nearly 60 percent of the entire U.S. goods and services trade deficit with the world.

Mears also expects multilateral pressure on China, especially from the European Union, which has suffered from more severe currency shifts in relation to the yuan.

"The Europeans are actually in worse shape than we are right now in terms of the adverse impact of the value of the yuan," said Mears. "We're already seeing comments coming out the European Union. I think those are going to intensify."

Deficit to continue

Mears and Hufbauer agree that, even with changes in currency policy, there may always be a trade deficit with China because of factors like lower wage rates and U.S. investment in Chinese production.

The last time bilateral trade was roughly in balance was 1986, when volumes were only about one-fiftieth of trade levels now.

The figures raise the question of how low the deficit would have to go before it ceases to be a cause of major concern between the two trading partners.

Hufbauer said the trade tension is a function of both the bilateral imbalance and the size of the total U.S. trade deficit, which calls attention to China disputes.

"I think if the U.S. trade deficit is between U.S. $250 billion and U.S. $350 billion a year, it's not a big issue," said Hufbauer. "That's an acceptable level from a world macroeconomic perspective." The deficit in goods and services stood at U.S. $380.7 billion last year.

"But if the number begins to move up into the U.S. $350-450 billion range and higher than that, then it's a big issue, and then the spotlight goes on China," he said.

Mears agreed that conflict over China issues has grown along with the size of the trade deficit.

"Certainly, for the foreseeable future, it would be expected that the United States would have a trade deficit with China," Mears said. "The problem, of course, is the degree of imbalance."

If the annual deficit were to shrink to U.S. $150 billion, a level last seen before 2004, it would relieve much of the political pressure on the issue, the analysts said.


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