Future China/US Trade War?

There has been an abundant amount of coverage on the possible US sanctions towards Chinese goods if China doesn’t appreciate the yuan at a faster pace than it is doing currently. Paulson: China must implement reforms describes current US Treasury Secretary’s view of what’s going on.

Paulson said there is agreement in principle between the U.S. and China on the need for greater yuan flexibility. The discussion is about "the pace" of change.

"They're moving, but they're not moving, in my judgment, quickly enough," he said. "China is by far the largest" economy that doesn't have a market-determined currency, but enjoys the benefits of the global economy."

In a 4/21/07 Bloomberg.com article entitled Paulson Says China Must Yield `Tangible Results' on Yuan, Trade, Paulson described the possible consequences and repercussions if China doesn't act quickly.

"The American people are concerned, Congress is concerned and there's a lot of protectionist sentiment'' toward China, Paulson said in an interview on the ``Charlie Rose'' show on PBS television following his speech in New York." The more tangible reforms we see, the easier it is for me to deal with Congress.''

"There will be some, I believe, unattractive bills that are voted on in Congress,'' Paulson acknowledged. "I think the Chinese are very well aware of this -- I think they should be aware of it.''

Other parts of the Bush Administration have also taken action by imposing import duties on Chinese glossy paper and by filing 2 complaints to the WTO for copyright infringement and piracy.

The feeling of uncertainty in Chinese and US relations changed 2 days later in another Bloomberg piece by Matthew Benjamin. In his story, called Paulson May Be Unable to Get China, U.S. Off Collision Course, Benjamin painted a grim picture if reforms in the Chinese currency doesn't happen soon.

Without steps to allow a significant increase in the yuan, which most economists consider unlikely, Paulson may not be able to continue holding off moves in Congress to punish China.

"After years of talk and bluster, protectionism no longer seems like an empty threat,'' says Stephen Roach, chief global economist at Morgan Stanley in New York. "Trade sanctions against China are now all but inevitable.''

These increasingly real threats come with the backing of Congressional democrats who maintain that they would achieve “strong and effective legislation is likely to pass with a veto-proof margin.”

Although it might seem that the appreciation of the yuan is all but unavoidable, Benjamin also shows the hidden side of the currency struggle, relating both US and Chinese workers and businesses.

When China allowed a small rise in the value of its currency in 2005, Hangzhou food-company executive Wang Yuzhou saw his profits squeezed. Any further move threatens the livelihoods of his 1,000 workers and the 5,000 rural households that supply his plants, he says.

John Walker says China's currency policies have already cost 100 jobs at his Lewisburg, Tennessee, die-casting company. He wants the U.S. Congress to do "whatever it takes'' to force an increase in an undervalued yuan that he contends gives an unfair advantage to Chinese competitors.

Citizens on both side of the Pacific Ocean have money, family and livelihoods at stake. It is often easy for Americans (me included) to jump into the US perspective (of John Walker) while being ignorant of Wang Yuzhou’s plea.

But what can China do other than to appease the US on their currency appreciation wishes? The answer lies in a recent 4/18/07 NY Times article. China Leans Less on U.S. Trade describes the readjustment of China’s global trade strategy.

At booth after booth at China’s main trade fair (Canton Fair) this week, the refrain from Chinese business executives is the same: the American market is not as crucial as it used to be.

Instead, Chinese producers of everything from socket wrenches to sport utility vehicles say, their fastest growth these days lies in Europe, Africa, the Middle East, South America and elsewhere in Asia — in other words, practically anywhere other than the United States.

So it is throughout China. With ample support from the Beijing government — including a flurry of trade missions to Africa and assistance with trade fairs in Germany, Australia or someplace in between — Chinese companies are poised to expand into the markets of many of the world’s rapidly growing economies.

By placing the focus on new markets for the abundant amount of Chinese goods (produced in cities like Shenzhen), Chinese businesses are beginning to hedge their profit margins and risk.

The government and companies across China increasingly see a danger in becoming too dependent on a single market (USA). So they are stepping up efforts to sell to other countries, particularly those outside the industrial world.

This change in direction is a small but important step for China. Maybe in the future, they will not need to be so dependent on American politics and their tariffs.

On the other side: what would happen to the US if cheap Chinese goods start decreasing?