By Jason Simpkins
Representatives from the United States and China will meet Tuesday at the Richard Nixon Presidential Library in Yorba Linda, California, to discuss a full docket of trade issues that will no doubt include China's massive trade surplus, the appreciation of the yuan, and a possible lawsuit over export restrictions.
The meeting is part of the U.S.-China Joint Commission on Commerce and Trade (JCCT), which is celebrating its 25th anniversary. U.S. Secretary of Commerce Carlos Gutierrez and U.S. Trade Representative Susan Schwab will co-chair the meeting with Chinese Vice-Premier Wang Qishan. Wang will make the trip with a dozen officials from the Ministry of Commerce, the Ministry of Finance, the Ministry of Agriculture, the Foreign Ministry, and others, Xinhua reported.
The China-U.S. JCCT has played "an irreplaceable role" in strengthening economic ties between China and the United States, Foreign Ministry spokeswoman Jiang Yu said at a press conference. Two-way trade between the two nations topped $300 billion last year – roughly 120 times the amount traded between the two nations 30 years ago, according to statistics from the Chinese Ministry of Commerce. China and the United States are currently each other's second largest trading partners.
Of course the meeting is far from a celebration of how far the two nations have come, but a serious government-to-government dialogue aimed at resolving bilateral trade disputes and expanding cooperation.
A broad range of disputes have popped up between the United States and China over the past year including quality and safety issues concerning Chinese exports, China's relationship with countries such as Iran and the Sudan, as well as .
However, the chief concern of the United States remains China's ballooning trade surplus, a surplus the U.S. says is facilitated by china's undervalued currency – the yuan.
China's export growth slowed to 21.1% year-over-year in August, from 26.9% in July, but the nation's trade surplus still hit a record-high $28.7 billion. Meanwhile, the United States' trade deficit rose by 5.7% to $62.2 billion in July, after climbing to a revised $58.4 billion in June. America's deficit with China soared 16% from June's $21.43 billion to $24.88 billion in July.
The United States attributes this growing imbalance to China's undervalued yuan.
"Since 2001, the annual trade deficit has increased more than $300 billion, and 3.8 million manufacturing jobs have been lost," Peter Morici, an economist and professor at the Robert H. Smith School of Business at the University of Maryland, told FinFacts.
"China and other major Asian exporters of manufacturers subsidize their sales in U.S. markets by suppressing the exchange rates for their currencies against the dollar by intervening in foreign exchange markets.
"Were this problem resolved," said Morici, "the trade deficit could likely be cut in half, GDP would rise by $300 billion, and about 2 million manufacturing jobs could be restored."
The United States has exerted endless pressure on Beijing to allow its currency to appreciate – an effort the Chinese government is entertaining, albeit grudgingly. The yuan has appreciated 20% against the greenback since Beijing removed its peg to the dollar in 2005. But that's still not enough.
Harvard economist Dani Rodrik says the yuan is still 50% below where fundamentals would dictate it should be trading versus other countries' currencies.
Taking the Fight to the WTO
In addition to China's currency valuation and the resultant U.S. trade deficit, questions concerning subsidies and tariffs in many Chinese industries are also likely to be addressed, as well as a possible action through the World Trade Organization.
The United States is close to filing suit against China at the World Trade Organization that would challenge export restrictions on raw materials used in steel-making and other industries, the Financial Times reported.
The FT article cited anonymous sources as saying U.S. trade officials have been working on the case for the past several months and are close to requesting consultations – the first step in the WTO settlement process.
The suit reportedly argues that Chinese export quotas and taxes on raw materials, particularly those associated with steel production, inflate global prices while reducing domestic costs, violating WTO regulations and putting U.S. producers at a disadvantage. The American Iron and Steel Institute last year claimed that the Chinese steel industry benefited from $52 billion in government subsidies over the previous decade, the FT said.
Also, in a letter posted on the WTO website, the United States called China's pork subsidies into question. The letter challenged China to justify an article of China's business law that "wholly exempts agricultural producers from the payment of enterprise income taxes with regard to the 'rearing of livestock,' including pork."
The United States alleges that loopholes in China's corporate income tax law exempts pork processors, and has asked the Chinese government how much revenue its pork producers and processors are generating each year. U.S. trade officials also asked about a subsidy of $14.60 (100 yuan) paid for every sow, and $2.2 billion in annual premiums paid out under an insurance program for Chinese pork producers.
Finally, the United States reiterated its reservations about China's 13% value-added tax for agricultural products (VAT).
"In its statement during last year's transitional review, China appeared to confirm that sales of agricultural commodities produced and sold by farmers in China, such as wheat, cotton and corn, are exempted from the VAT," the letter read, "while imports of these same products are assessed the VAT at 13%… Please explain how China justifies this discriminatory treatment."
If the Chinese delegation to the United States does not wish to answer these questions Tuesday, its next opportunity will be at a WTO meeting Sep. 17-18.
News and Related Story Links:
Dr. Peter Morici: US Trade Deficit surges; Boosts likelihood of Recession – More losses; Job losses mount
Wall Street Journal:
The Real Exchange Rate and Economic Growth
Wall Street Journal:
Undervalued Currency Helps Boost China Growth
US to challenge China over steel prices
World Trade Organization: