Although there were some positive results achieved during the second round of the Strategic Economic Dialogue (SED) talks between the U.S. and Chinese Governments last month in Washington, DC, it is clear that both sides came away from the discussions frustrated.

By Matthew Apfel*

Although there were some positive results achieved during the second round of the Strategic Economic Dialogue (SED) talks between the U.S. and Chinese Governments last month in Washington, DC, it is clear that both sides came away from the discussions frustrated. This frustration does not arise merely from the fact that little or no progress was made to address currency valuation or significant trade-related matters. The frustration seems to arise more from the fact that the Bush Administration has a long-term plan (which is more in sync with the Chinese outlook) that is irreconcilable with the short-term “fixes” that an increasingly protectionist Congress is pursuing. Adding to that complexity is that the Chinese Government can not internalize the reasons why the U.S. government is so divided; Chinese tradition is not based upon democratic politics where the leader is unable to speak with a single powerful voice.

It is in this context that the Bush Administration has called for increased dialogue with China, while at the same time implementing new policies on the importation of Chinese goods. The Administration has increasingly come under Congressional pressure to take harsher action in terms of counteracting Chinese trade subsidies. As a result, the Commerce Department recently announced that it would alter its 23-year old policy of not applying countervailing duties to non-market economies and issued a preliminary affirmative countervailing duty determination on coated free sheet paper from China.

Furthermore, there was no real progress made during the SED on U.S. export controls on dual-use technology. The Chinese argue that U.S. export controls are a mechanism which acts as an “unfair trade barrier” and “blocks China’s access to advanced technology and blunts the U.S. comparative advantage in selling advanced products to China.” Before, during and after the second round of SED talks in Washington, the Chinese have labeled export control restrictions as a “major” issue they want resolved through negotiation. Many in the Bush Administration however, do not see that the economic benefits of removing such controls outweighs the military necessity of retaining them. Indeed, Bureau of Industry and Security (BIS) officials have stated that only a very small fraction of U.S. exports to China required an export license and BIS is poised to issue in the near future a regulation amending the Export Administration Regulations to impose export controls on certain categories of dual-use goods intended for the Chinese military.

Despite these actions, it seems questionable whether the Bush Administration is prepared to label China a “currency” manipulator and even more unlikely that the U.S. Trade Representative will accept the recent petition submitted by members of Congress to the U.S. Trade Representative under section 301 of the Trade Act of 1974 alleging that China’s currency is undervalued and manipulated. Treasury Secretary Paulson and his counterparts seem to take the view that any action by Congress to label the Chinese Government’s alleged currency manipulation as a trade subsidy will only aggravate U.S.-China relations and will lead only to negligible short term gains. Indeed, according to a recent article in The Economist, “it is true that a stronger, more flexible Yuan makes sense for China, because it would help shift spending towards imports and would give Beijing’s policymakers greater control over interest rates making it easier to prevent the economy from overheating. But the effect on America would be small.”

If Congress nevertheless succeeds in its attempt to pass a Chinese currency-related bill, such as the one currently being drafted in the Senate that would pressure the U.S. Treasury to intervene in global markets to adjust China’s currency, China likely will react sharply. In a statement made after the U.S. lodged a complaint against China at the World Trade Organization over intellectual property rights, Vice Premier Wu Yi said China will “fight to the end” and will not tolerate sanctions. Although China has been warning the Bush Administration and Congress to utilize restraint in its “unilateralist protectionism,” those warnings may evolve into an outright trade war which would have disastrous effects for both countries in the long run.

*Matthew Apfel is a third year law student at George Washington University. He can be reached at msapfel@law.gwu.edu.

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