President Barack Obama joked during Chinese President Hu Jintao's state visit to the United States in January that his nation wants to sell China "all kinds of stuff" but significant impediments to a freer and more fruitful trade relationship remain - on both sides.
The United States exports some US$100 billion worth of goods and services to China every year, making the country America's third-largest trading partner. China sells nearly three times as much to the United States.
This imbalance in the trade relationship has been criticized by American lawmakers who accuse China of manipulating its currency and protecting its own market from foreign imports
At a time when Americans believe that their economy is in decline and China on the verge of surpassing it as the world's largest, such discord is unsettling and potentially dangerous. The imbalances that exist in the Sino-American relationship have to be addressed and remedied.
While China sells more to America than vice versa, American exports to China are growing at twice the pace of exports to the rest of the world. China's economy continues to expand at stellar rates every year and internal demand is increasing. China is a huge market for American services and manufacturers but it is, in part, shut off from foreign competition.
China has gradually been opening its market to international trade but significant bans and restrictions remain in the form of tariffs, subsidies and red tape. Foreign investment is especially curtailed although new rules adopted in 2009 explicitly allow foreigners to participate in business partnerships. The poor protection of property rights in China is a major impediment to foreign direct investment however. Copyrights, patents and trademarks are routinely stolen.
America restricts free trade as well, if to a lesser degree. Sales of high technology and weapons are subject to strict regulations, forcing China to do business in Europe and with Russia. The Chinese prohibit foreign investment in particular industries and so does the United States, channeling Chinese money into a limited number of sectors of the American economy.
One factor that tilts the balance in China's favor is its undervalued currency, which, the Americans lament, keeps Chinese exports artificially underpriced at the expense of American products.
Yet the Chinese currency appreciated by over 20% between 2005, when China relaxed its hard peg to the US dollar, and 2008. In the wake of the global financial meltdown, China reinstated the peg but it has allowed the yuan to gain in value by another 3% since last summer.
Factor in inflation and the appreciation is even more substantial. US Treasury Secretary Timothy Geithner pointed out in January that "Chinese inflation is much more rapid than the United States now. Chinese inflation is probably going to be more than twice, three times US inflation rates for a long time to come," he predicted.
As a result, exchange rates, in real terms, are appreciating - "at roughly a pace of about 10% a year," according to Geithner. "And that's a very substantial material change," he admitted.
It is. The Wall Street Journal calculated that since 2005 the real value of the yuan has appreciated by 50%! Adjusted for inflation, 100 yuan could be exchanged for about $12 in 2005. Today, they would buy $18.
China won't allow its currency to gain in value even faster as long as it has millions still living in poverty and millions more dependent on exports to the West.
Premier Wen Jiabao defended Chinese monetary policy in Brussels last year. On the whole, China's economic development still lacks balance, coordination and sustainability, Wen said. A sudden increase in the yuan‘s value, he told the Europeans, could bring "disaster" to China. "Factories will shut down and society will be in turmoil."
Wen was reminded in 2008 of just how dependent China had become on the American economy. According to official estimates, some 6.7 million Chinese lost their jobs in 2008 because of the global downturn. when hundreds of thousands of Chinese businesses shuttered. Independent analysts have put the number of unemployed that year north of 20 million.
What is certain is that during the first 10 months of 2008, the Chinese stock market lost nearly 70% of its value while exports declined dramatically - and continued to decline into 2009.
By the end of 2008, in the southern Guangdong province alone, China's industrial heartland, one out of five factories in the major cities there had closed. Home prices dropped by 15% in a single month in Shenzhen.
China knows that it has to enhance its internal demand in the years ahead but cannot be expected to change from export dependency to a consumption model overnight.
America's economic predicament, which also affects China, isn't just China's fault. If it were to relax all trade restrictions, the United States could not suddenly get 14 million people back to work.
Freer trade will stir employment and innovation in the long term however, in both countries. China's phenomenal economic success of recent years is largely due to America's willingness to buy Chinese products, while China's willingness to finance American deficit spending by buying hundreds of billions worth of Treasury bonds is enabling the political establishment in Washington to postpone the sort of tough spending choices that would otherwise be necessary.
The Sino-American trade relationship is one of the mutual dependence, indeed, one of interdependence. The two economies are so integrated that there's only one way forward that makes sense - deepening that integration.
The United States exports some US$100 billion worth of goods and services to China every year, making the country America's third-largest trading partner. China sells nearly three times as much to the United States.
This imbalance in the trade relationship has been criticized by American lawmakers who accuse China of manipulating its currency and protecting its own market from foreign imports
At a time when Americans believe that their economy is in decline and China on the verge of surpassing it as the world's largest, such discord is unsettling and potentially dangerous. The imbalances that exist in the Sino-American relationship have to be addressed and remedied.
While China sells more to America than vice versa, American exports to China are growing at twice the pace of exports to the rest of the world. China's economy continues to expand at stellar rates every year and internal demand is increasing. China is a huge market for American services and manufacturers but it is, in part, shut off from foreign competition.
China has gradually been opening its market to international trade but significant bans and restrictions remain in the form of tariffs, subsidies and red tape. Foreign investment is especially curtailed although new rules adopted in 2009 explicitly allow foreigners to participate in business partnerships. The poor protection of property rights in China is a major impediment to foreign direct investment however. Copyrights, patents and trademarks are routinely stolen.
America restricts free trade as well, if to a lesser degree. Sales of high technology and weapons are subject to strict regulations, forcing China to do business in Europe and with Russia. The Chinese prohibit foreign investment in particular industries and so does the United States, channeling Chinese money into a limited number of sectors of the American economy.
One factor that tilts the balance in China's favor is its undervalued currency, which, the Americans lament, keeps Chinese exports artificially underpriced at the expense of American products.
Yet the Chinese currency appreciated by over 20% between 2005, when China relaxed its hard peg to the US dollar, and 2008. In the wake of the global financial meltdown, China reinstated the peg but it has allowed the yuan to gain in value by another 3% since last summer.
Factor in inflation and the appreciation is even more substantial. US Treasury Secretary Timothy Geithner pointed out in January that "Chinese inflation is much more rapid than the United States now. Chinese inflation is probably going to be more than twice, three times US inflation rates for a long time to come," he predicted.
As a result, exchange rates, in real terms, are appreciating - "at roughly a pace of about 10% a year," according to Geithner. "And that's a very substantial material change," he admitted.
It is. The Wall Street Journal calculated that since 2005 the real value of the yuan has appreciated by 50%! Adjusted for inflation, 100 yuan could be exchanged for about $12 in 2005. Today, they would buy $18.
China won't allow its currency to gain in value even faster as long as it has millions still living in poverty and millions more dependent on exports to the West.
Premier Wen Jiabao defended Chinese monetary policy in Brussels last year. On the whole, China's economic development still lacks balance, coordination and sustainability, Wen said. A sudden increase in the yuan‘s value, he told the Europeans, could bring "disaster" to China. "Factories will shut down and society will be in turmoil."
Wen was reminded in 2008 of just how dependent China had become on the American economy. According to official estimates, some 6.7 million Chinese lost their jobs in 2008 because of the global downturn. when hundreds of thousands of Chinese businesses shuttered. Independent analysts have put the number of unemployed that year north of 20 million.
What is certain is that during the first 10 months of 2008, the Chinese stock market lost nearly 70% of its value while exports declined dramatically - and continued to decline into 2009.
By the end of 2008, in the southern Guangdong province alone, China's industrial heartland, one out of five factories in the major cities there had closed. Home prices dropped by 15% in a single month in Shenzhen.
China knows that it has to enhance its internal demand in the years ahead but cannot be expected to change from export dependency to a consumption model overnight.
America's economic predicament, which also affects China, isn't just China's fault. If it were to relax all trade restrictions, the United States could not suddenly get 14 million people back to work.
Freer trade will stir employment and innovation in the long term however, in both countries. China's phenomenal economic success of recent years is largely due to America's willingness to buy Chinese products, while China's willingness to finance American deficit spending by buying hundreds of billions worth of Treasury bonds is enabling the political establishment in Washington to postpone the sort of tough spending choices that would otherwise be necessary.
The Sino-American trade relationship is one of the mutual dependence, indeed, one of interdependence. The two economies are so integrated that there's only one way forward that makes sense - deepening that integration.
Asia Times
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