China trade surplus shadows Obama visit

By Olivia Chung

HONG KONG - China's surging trade surplus, with the increase last month almost double the September figure, makes it impossible that trade issues will not be a key topic when United States President Barack Obama makes his first visit to Beijing this Sunday.

The surplus was US$24 billion in October, compared with $13 billion in September, bringing the total for the year so far to $159.23 billion.

Trade tension between the two countries was already rising before the latest data were released on Wednesday, with the US imposing a series of anti-dumping sanctions on Chinese imports and Beijing investigating the possibility of action against imports from the US.

This week, before leaving on his nine-day trip to Asia, Obama warned that the economic relationship between the countries had become deeply imbalanced in recent decades, with a trade gap between the countries and huge Chinese holdings of US government debt.

The US and China had to work together on the big issues facing the world, and any competition between them had to be fair and friendly, Obama said in a White House interview with Reuters.

He said he would be raising with Chinese leaders the sensitive issue of their currency, the yuan, which is seen by some in US industry as significantly undervalued and as an important contributor to the imbalances.

The financial crisis over the past year has played havoc with international trade, not least between China and the rest of the world. Bilateral trade with the US, China's second-biggest trading partner in the period, is down 14.8% in the first 10 months this year, to $239.36 billion. Two-way trade with close neighbor Japan, China's third-largest trading partner, has crashed 19.3% in the period, to $182.34 billion. Business with the European Union, China's biggest trading partner, has suffered almost as badly, declining 18.7% in value to $292.42 billion.

"As we emerge from an emergency situation, a crisis situation, I believe China will be increasingly interested in finding a model that is sustainable over the long term," Obama said. "They have a huge amount of US dollars that they are holding, so our success is important to them ... The flip side of that is that if we don't solve some of these problems, then I think both economically and politically it will put enormous strains on the relationship."

China holds about $2.27 trillion in foreign reserves, about two-thirds of it in US dollars, as of the end of September, up 19% from a year earlier. The country held Treasury bills worth about $797.1 billion in August, making China the world's largest holder of US Treasuries outside the United States, according to the US Treasury Department.

While China's purchases of Treasuries helps the US government finance its spending, Beijing is under pressure to boost the value of the yuan, which some economists argue would help ease the trade imbalance. After a 21% one-off appreciation of the yuan in 2005 and slight subsequent strengthening, the Chinese currency has been flat against the United States dollar, at about 6.83, since the middle of last year. With the global economy showing increasing signs of recovery, expectations are growing that the yuan will be allowed once more to appreciate.

Qin Gang, spokesman of the Foreign Ministry, on Tuesday called on the US to properly handle bilateral trade problems, saying the nations should negotiate on an equal basis and oppose trade and investment protectionism in any form.

"Compared to the huge common interests and benefits brought about by bilateral trade, the problems in trade relations are secondary," said Qin.

The US decision this month to impose tariffs of as much as 99% on Chinese steel pipes after American producers complained they were being dumped at below-market prices, and the earlier imposition of stiff duties on tires and other products reflect the growing tension in Sino-US trade relations. In the first nine months of this year, the US started 14 investigations into Chinese exports with a total value of $5.84 billion. While the number of probes is down 6% from a year earlier, the value has soared by 639% in the period, according to China's Ministry of Commerce.

The ministry said the imposition of duties on steel pipes was the biggest US trade action against China to date, topping the US administration's move to put a 35% tariff on $1.85 billion worth of Chinese-made tires late in September.

Last year, Chinese steel pipe exports to the US were worth $3.2 billion. A Commerce Ministry spokesman, Yao Jian, said the steel pipe anti-dumping case would affect more than 90 steel plants, including state-owned Baosteel Group, Hunan Valin Steel and Tianjin Pipe (Group) Corp.

Yao urged the US to follow pledges made recently at the 20th China-US Joint Commission on Commerce and Trade talks in Hangzhou, capital of east China's Zhejiang province. US Secretary of Commerce Gary Locke said in Hangzhou that the US would review granting China market economy status, which would ease controls on US exports to China

"We continue to discuss what it will take for China to be declared a market economy," he was quoted as saying by the China Daily.
China wants the US to speed up recognition of China as a market economy, ahead of the 2016 deadline agreed on when Beijing negotiated entry into the World Trade Organization. China hopes market-economy status will give the country more leverage in trade disputes.

"By not recognizing China as a market economy, the US is acting in a discriminatory manner," Yao said.

In a move seen as retaliation against US tariffs, the Commerce Ministry last Thursday said it had expanded its investigation into imports of US chickens and chicken products, accusing Washington of providing producers with unfair incentives, such as low-priced chicken feed. The investigations were extended to alleged subsidies by local governments in Arkansas and Texas to chicken farmers.

The ministry said on its website last Friday that it had also launched an investigation into alleged dumping and unfair subsidies for cars and off-road vehicles with an engine size of two liters or above exported to China from the US. The ministry said the probe, which could lead to additional duties on vehicles made by General Motors, Ford and Chrysler, was made in response to complaints from domestic carmakers.

"This is a gesture to show the US that China is taking a hard stance in dealing with American protectionist measures," said Tang Sai-kit, a Hong Kong-based commentator on the automotive industry. Even so, "as imported vehicles from the United States are not substantial, [any measures] would not have a big impact on the US auto industry."

US models accounted for about 14% of the 145,000 cars China imported in the first half of this year, according to the China Chamber of Commerce for Import and Export of Machinery and Electronic Products.

The latest Chinese action comes after it earlier responded to the US imposition in September to tariffs on automobile and light-truck tires by filing a complaint to the World Trade Organization and initiating the now broadened anti-dumping investigations into imports of US auto parts and chicken products.

"The US anti-dumping ruling is unfair to Chinese producers who sold pipes in the US at a 20% premium to our domestic prices," said Li Liancang, an export manager at the state-owned Tianjin Pipe Group, in an interview with Bloomberg. "Chinese exports to the US have almost stopped since the preliminary ruling in September."

The tariffs were imposed even after China's steel exports to the US, hit by the economic downturn, plunged by 73% in the year through August compared with the year-earlier period, the China Iron and Steel Association said last month.

The White House is under increasing domestic pressure to be seen as protecting US workers, with the US unemployment rate jumping to 10.2% in October from 9.8% in September, hitting its highest level in more than 26 years. It is also battling to ensure support for initiatives such as the Obama healthcare reforms.

"Trade protectionism is particularly serious amid the global economic crisis as some countries are trying to protect their industries and retain jobs," Zhou Shijian, a senior analyst at the Sino-US Relations Research Center of Tsinghua University, said. "The United Steelworkers Union, which lobbied in both the steel pipe and the earlier tire cases, was a major supporter of President Obama during last year's presidential campaign, so the union is an important ally in his fight for his healthcare reform plan."

The trend towards increasing tariffs was likely to continue, Zhou said. "Given that the global economy has not fully recovered from the recession, leading to more political and economic issues, the US is likely to target more China-made products and, even worse, other countries will follow suit."

Jing Ulrich, managing director and chairman of China Equities and Commodities at JP Morgan, said Obama's visit to China was likely to heighten focus on a number of recent trade disputes between the countries, but these affected only a small part of their business relationships.

"In spite of recent trade tensions, the disputed products represent a relatively small volume of bilateral trade, and relations between the United States and China have remained fairly constructive, in light of concerns at the onset of the global financial crisis that protectionism could spiral out of control,” Ulrich said.

The issue of the yuan's valuation was also expected to feature prominently in discussions, she said. "Chinese policymakers have pledged to maintain a stable exchange rate to allow domestic manufacturers and exports to adjust to market conditions." The global economic downturn means that Chinese exporters are struggling, despite the impression of strength given by the trade surplus. Exports in the January to October period were down 20.5% from a year earlier.

The widening trade spat between the countries also indicated the ambiguous nature of US policy towards China, which Obama's visit was unlikely to end, according to Zhou Xizeng, a Beijing-based analyst with CITIC Securities Co.

Prior to the Hangzhou talks, Secretary of State Hillary Clinton asserted that the two countries were in the same boat in these troubled times, while Obama has said that Sino-US ties are the "most important bilateral relations in world".

But due to domestic challenges, such as rising unemployment and general public discontent over the financial sector, the US administration is trying to win domestic support "by every means possible, including vague policies towards China. As the problems will not go away soon, such policies will continue," Zhou said.

Olivia Chung is a senior Asia Times Online reporter.

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