The coming US-China trade conflict

The first partner to find Chinese trade practices unacceptable will be the US. Up to this point, the pattern of American deficits and Chinese surpluses has been amplified rather than dampened by the global crisis. The Sino-American bilateral trade imbalance reached a record US$28 billion in October, despite a much weaker US economy. This imbalance is on its way to reaching US$275 billion for 2008 and, barring effective consumer stimulus in the PRC, may accelerate in early 2009.

The new Congress and President will be confronted with a record-breaking bilateral deficit in concert with soaring American joblessness. Progress on the exchange rate will no doubt be considered inadequate: it required three years, from July 2005 to July 2008, for the yuan to gain 16 per cent against the dollar, whereupon it promptly stalled. In a single month, from September 29 of this year, the yuan gained more than 14 per cent against the euro.

When Congress convenes again in January, there will immediately be pressure to act against the PRC. President-elect Barack Obama appears, at least, to be far less committed to open trade than were Presidents Bush and Clinton. But liberalisation on the Chinese side should have proceeded much more quickly during the boom years of 2003-2006. Now Beijing is much less willing to accommodate American requirements.

Threat to the global trading system

Congress may well pass unprecedented legislation targeting China in the spring of 2009, featuring a short period of time by which the PRC must satisfy any of a variety of possible American demands or face trade sanctions. The Obama Administration could find it advantageous to let the clock tick. If the Chinese economy has not recovered by next autumn, Beijing will look to sidestep these demands and, for domestic political purposes, will reject at least one outright. Thus, odds are high that the US will impose prohibitive tariffs or erect other barriers to Chinese goods, seeking to reduce its imports from China on the order of US$100 billion.

These steps are unlikely to be WTO-compliant. The EU, Japan, and other would then be permitted by WTO rules to raise barriers against diversion of Chinese goods to their markets. Some form of Chinese retaliation is certain. If intemperate, such retaliation will prompt further action by the US and perhaps other countries, threatening the global nature of the trading system.

The mainstream media are just beginning to realise the severity of China's economic problems; they are behind the curve. If the US is to avert a crushing blow to an economic relationship that could have serious consequences for all its trade partners, policy makers have to move far ahead of the curve.