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Hu visit leaves trade deficit with China, other issues in limbo

President Bush’s much-anticipated meeting with Chinese President Hu Jintao appears to have done little to address the $202 billion U.S. trade deficit with China or other sources of economic tensions between the two superpowers.

Administration officials attempted to put a positive spin on the 90-minute, April 20 meeting, which followed a White House arrival ceremony marked by several incidents that might have been funny if the stakes of the Chinese president’s first official visit to Washington hadn’t been so high.

Manufacturing executives had been hopeful that President Bush, suffering from low approval ratings, would use the talks to wring some concessions from Hu and help himself regain a degree of the popularity he enjoyed in his first term. But the administration came away with little to show for its efforts.

“The president failed to make any significant progress in his talks with Hu,” said Kevin L. Kearns, president of the U.S. Business and Industry Council, which represents 1,500 small- to medium-sized manufacturing companies. “It was more of the same do-nothing-to-upset-the-Chinese approach.”

“We were really hoping that significant progress would be made so that both governments would begin to work together to address this very large trade imbalance,” said Frank Vargo, international vice president of the National Association of Manufacturers.

China booming

Shortly before the trip, the Chinese government announced that its economy grew by 10.2 percent in the first three months of this year, which was faster than the 9.9 percent growth it registered in 2005. Chinese officials said the amazing rate of expansion (U.S. GDP typically grows 3 percent to 4 percent annually) was unintentional. “We do not want, nor are we pursuing over-rapid economic growth,” he told reporters before leaving Beijing for his trip to the United States.

The surge in the Chinese economy, which could translate to more exports of textiles and apparel and other manufactured goods, is expected to lead to another increase in its trade surplus with the United States, which reached $202 billion last year.

U.S. manufacturing groups say much of the trade imbalance is due to China’s continued refusal to allow more than a token devaluation of its currency, the yuan. Some economists claim China’s pegging of the yuan to the dollar makes Chinese exports 40 percent cheaper than products in the United States. Sen. Charles Schumer, D-N.Y., has threatened to introduce legislation that would impose sanctions on China until it devalues the yuan, but had agreed to delay it until after Hu’s visit to the United States. President Bush said Hu realizes the trade deficit is a major concern for his administration and other Americans.

“He recognizes that a trade deficit with the United States, as substantial as it is, is unsustainable,” the president said during a joint photo opportunity with Hu in the Oval Office.

Early apology

Bush had to begin the meeting with an apology after a Falun Gong supporter who was granted a press pass heckled Hu during the arrival ceremony. Chinese officials reportedly had warned the U.S. Protocol Office to be careful whom it admitted to the event. (The Falun Gong supporter, Wang Wenyi, crashed another media event in Malta five years ago and got into an argument with former president Jiang Zemen.)

A White House emcee also announced the Chinese national anthem as that of the Republic of China, the official name of Taiwan, the island that the People’s Republic of China claims as its own.

But Kearn said those missteps were nothing compared to the administration’s failure to seize the meeting as an opportunity to extract more from the Chinese than “deceptive Chinese promises and more tinkering around the edges.

“Our $200-plus billion trade deficit with China is rather blunt proof that Beijing’s predatory economic practices are hollowing out America's domestic industries. President Bush should have told President Hu that unless China cleans up its trade policy act by a specific date, it will start losing access to the U.S. market.”

Kearns said the president’s own advisors have acknowledged the need to change America’s losing game on China trade. Earlier this year, former U.S. Trade Representative Rob Portman said U.S.-China trade relations need to enter “a new phase of greater accountability and enforcement.”

Entry no help

Reports from the U.S. Trade Representative’s office also acknowledge that – contrary to the administration’s promises – China’s entry into the World Trade Organization has not brought its protectionism under control.

In a 2005 report, USTR said WTO membership has not significantly reduced China’s theft of intellectual property. Its latest annual report on foreign trade barriers also notes that China has increasingly resorted to industrial policies that limit market access for foreign goods but support increased exports.

The American Manufacturers Trade Action Coalition says the trade deficit and the Chinese policies responsible for it cost the U.S. economy more than 275,000 jobs in 2005.

“Manipulated currency, non-performing loans made by Chinese state-run banks, intellectual property theft, and other state-sponsored subsidies are the driving forces behind the job-destroying U.S. trade deficit with China,” said Auggie Tantillo, AMTAC’s executive director.

“The only way for the United States to dig itself out of this hole is to use access to the U.S. market as leverage to get China to play by the rules,” said Tantillo. “If China does not want to do that, they should not expect to receive the same level of access to the U.S. market that they have now.

“You cannot have a market where domestic U.S. companies must abide by free-market rules while Chinese companies are free to cheat with impunity. Such an arrangement is unsustainable because it gives Chinese exporters an enormous competitive advantage and it undermines both the rule of law and the confidence of U.S. manufacturers in the U.S. government.”

Largest creditor

Conventional wisdom says U.S. officials must exercise restraint in criticizing China because of the latter’s position as the U.S. government’s largest creditor. Latest estimates say Chinese banks now hold more than $300 billion in U.S. securities purchased with the dollars flowing in in exchange for U.S. exports to the United States. Kearns says fears of Chinese retaliation against potential American trade remedies are overblown. “China cannot afford to suddenly dump its sizable holdings of U.S. Treasury bills. These purchases have helped sustain the U.S. market in which China desperately needs to sell,” he notes.

“If China stops subsidizing American consumption, their home unemployment crisis will worsen. That would threaten the regime’s hold on power.”

The U.S. economy is indeed vulnerable to a pullback of foreign capital overall, Kearns noted. This vulnerability results mainly from America’s huge and rapidly growing global trade and current account deficits. These twin deficits are bound to undermine the nation’s creditworthiness.

“The longer China’s protectionism is allowed to continue, the less incentive China will have to correct the serious distortions of its own banking system and broader economy,” said Kearns. “At the same time, ballooning American deficits and net debts could trigger a dollar crisis and a global economic crack-up. This is why President Bush missed a major missed opportunity today to direct Beijing toward a more sustainable economic path that can solidify the entire global economy’s currently shaky foundations.”

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