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Sino-U.S. Economic & Trade Relations
Special> Sino-U.S. Economic & Trade Relations
UPDATED: January 13, 2008 NO.3 JAN.17, 2008
Issues at Stake
As China becomes the largest source of U.S. imports and its third largest export market, both countries will benefit

Two features-increasing friction with occasionally sharp conflicts as well as rapid growth and mutual benefits-remained prominent in China-U.S. economic and trade relations in 2007.

According to China Customs statistics, from January to October 2007, China-U.S. trade totaled $248.2 billion, an increase of 15.7 percent over the year earlier period. Exports to the United States reached $191 billion, a 15.2-percent increase. Imports from the United States totaled $57.2 billion, a 16.3-percent increase. And China's trade surplus with the United States registered $133.9 billion, a 15.1-percent increase. The total trade value of the whole year is estimated to exceed $300 billion. China's imports from the United States is expected to reach close to $70 billion. Its trade surplus with the United States is projected to near $160 billion, posting a notable reduction in its current growth rate.

According to U.S. Customs statistics, from January to October 2007, China-U.S. trade totaled $318.6 billion, an increase of 13.4 percent over the same period of 2006. Exports to China reached $52.5 billion, a 16.3-percent increase. Imports from China were $266 billion, a 12.8-percent increase. And America's trade deficit with China registered $213.5 billion, a 12-percent increase. The total trade value of the whole year is estimated to approach $390 billion. America's exports to China is expected to amount to $63.5 billion, whereas its imports from China is expected to hit $320 billion. Its trade deficit with China is projected at about $256.5 billion, posting a reduction in its current growth rate.

U.S. Customs statistics also indicate that China replaced Canada as the largest source of American imports in the first 10 months of 2007. It also surpassed Japan to become America's third largest export market. Among its major trading partners, the United States had the fastest export growth to China.

With the rapid development of China-U.S. economic and trade cooperation, economic and trade frictions periodically surface. Political factors obviously have interrupted the smooth development of bilateral economic and trade cooperation.

On December 14-15, 2006, during the first session of the China-U.S. Strategic Economic Dialogue (SED), U.S. Treasury Secretary Henry Paulson said the main issue of the SED was exchange rate of the yuan, the Chinese currency. This demonstrates that the Bush administration strongly demanded a large appreciation of the yuan to reduce its trade deficit with China. During a Senate Banking Committee hearing on February 7, 2007, Paulson said the Bush administration, facing the ever-growing U.S. trade deficit, had exerted its efforts to urge the Chinese Government to quicken its pace of letting the yuan appreciate. China had not yet worked out a package of monetary policies that the United States anticipated and needed, he said. Paulson threatened that if China did not hasten its yuan reform, the international community would lose its patience.

The exchange rate issue remained the focus of the second session of the SED held on May 22-23, 2007, in Washington. At a press conference on May 24 after the meeting with the Chinese delegation, Bush said one of the issues that the U.S. side had emphasized to Vice Premier Wu Yi and the Chinese delegates was that the United States was very much concerned about whether China would allow the yuan, also known as the renminbi, to appreciate.

During the third session of the SED held in Beijing on December 12-13, 2007, Paulson once again strongly demanded "a faster appreciation of the renminbi." He said the yuan's exchange rate was not only an economic issue in Sino-American relations, but also had been a reflection of U.S. psychological anxiety under the pressure of Chinese competitiveness.

By the end of October 2007, the Chinese currency had increased by 10 percent against the dollar. U.S. government statistics show that from January to October in 2007, the U.S. trade deficit rose to $213.5 billion, an increase of 28 percent over the $166.8-billion deficit with China during the same period in 2005. China introduced "a managed floating exchange rate regime" in July that same year. This means that the increase in the yuan's value has played no role in reducing the U.S. trade deficit with China.

As a matter of fact, low labor costs and industrial centralization are the key factors behind the competitiveness of Chinese products. The Office of the U.S. Trade Representative estimated that the hourly pay of one industrial worker in China's costal areas was $0.77 in 2006, while that of an American industrial worker was $20, or 26 times more. How much should the yuan appreciate to offset the big difference in labor costs?

In May 2007, the Bush administration used pressure on the yuan's appreciation as a leverage to force China to open its financial and service industries. Although the White House had been soft-spoken on the yuan's exchange rate issue and Congress had taken a more aggressive approach, they joined forces to push China to gain more benefits for the United States.

Food safety is another issue of hot debate between the two countries. In spring of 2007, dog food from China triggered concerns in the United States about the safety of Chinese toys and food. Some U.S. media exaggerated and played up the food safety issue, calling Chinese products "dangerous imports."

The Chinese Government did its best to clarify the emerging safety incidents. It also ordered a blanket check on product quality and food safety throughout the country from August to December, a four-month campaign that achieved satisfying results.

Government departments in both countries held serious talks on the issue. The two sides signed the Memorandum of Agreement on the Safety of Food and Feed and the Memorandum of Agreement on the Safety of Drugs and Medical Devices on December 11, 2007. They signed another memorandum of agreement to strengthen cooperation on sound environmental management practices related to imports and exports on the following day. The agreements will facilitate the smooth trade of food, medicine and toys between China and the United States.

Since it adopted the reform and opening-up policy three decades ago, 70 percent of China's foreign investment has been from East Asia. The region has shifted to the Chinese mainland their products that originally caused a trade surplus with the United States. The products made by joint ventures or foreign-funded enterprises in China are not actually "made in China" but "made in East Asia."

The China-U.S. trade issue should not be dealt with in the scope of bilateral trade but in the environment of multilateral trade. In 2006, China posted a trade surplus of $144.3 billion with the United States, but a deficit of $153.9 billion with other countries in East Asia, according to China Customs statistics. In this sense, America's trade deficit with China is in fact a trade deficit with East Asia.

By the end of October 2007, U.S. businesses had set up more than 52,000 enterprises in China with an actual investment of $56 billion. Most of the products made by these enterprises are sold in China or in China's neighboring countries or regions. According to statistics from China's Ministry of Commerce, the sales of U.S.-funded enterprises in China topped $120 billion in 2006. They exported more than $80 billion worth of products to China's neighboring countries and regions. These two figures could offset 86 percent of the $232.5 billion U.S. trade deficit with China in 2006, according to U.S. statistics.

Generally speaking, economic and trade cooperation between China and the United States brings about equal and mutual benefits. That's why their bilateral economic and trade cooperation can have sustained growth.

The third session of the SED concluded with 31 agreements, an achievement made through concerted and pragmatic efforts by the two countries. In particular, the consensus on energy cooperation, energy conservation and environmental protection has expanded the frontier of bilateral cooperation. Insiders recognize that Sino-American cooperation in these areas can create multibillion-dollar business opportunities for U.S. industry, thus greatly helping to reduce the U.S. trade deficit with China.

In addition, China and the United States signed a memorandum of understanding to make it easier for Chinese tourist groups to visit the United States. China said the United States was the 134th overseas tourist destination for its citizens. Officials from the U.S. Commerce Department believe this policy change can increase the American tourism industry's earnings by $500 million every year.

The Chinese Government does not intend to pursue a trade surplus with the United States. Since 2004, it has cut export tax rebate rates several times. It has not only cancelled export tax rebates for products whose manufacturing causes heavy pollution and consumes huge amounts of energy and natural resources, but also imposed export tariffs on them to control their exports. On July 1, 2007, the Chinese Government introduced a major reduction in the export rebate rates for 2,831 products, accounting for 37 percent of the total number of Chinese exports. Of these, the tax rebates for 553 export products that are produced at the cost of natural resources and the environment were cancelled.

Coupled with this was the continuous appreciation of the yuan. By December 29, 2007, the Chinese currency had appreciated by 11.6 percent against the dollar. It is evident that the purpose of the Chinese Government was to control the increasing momentum of exports. And it has achieved the desired effects. China's exports increased 35.4 percent in 2004, 28.4 percent in 2005 and 27.2 percent in 2006 and are estimated to increase about 25 percent in 2007. The year 2008 will see an export growth rate of less than 20 percent.

In 2008, the U.S. economy is projected to register slow growth, which will have a negative impact on China's exports. Usually, an 1-percentage-point decline in the growth of the American economy will translate into 5-percentage-point reduction in China's exports to the United States. It will, however, help the United States increase its exports to China. As a result, America's trade deficit is poised to decline.

The United States will hold its presidential election in 2008. Republican and Democratic presidential candidates tend to attack China on the pretext of the trade deficit, the yuan's exchange rate and product safety to gain votes. However, this typical political intervention will not affect the overall development of the two countries' economic and trade cooperation. The rapid expansion of China-U.S. trade ties serves the interests of both nations.

Estella Zhou is a visiting scholar in the United States. Zhou Shijian is standing councilor of the China Association of American Studies

(The article was translated by Wang Lijun, associate professor at the Capital University of Economics and Business)

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