Industry Market Trends
China Trade Disputes Loom Large
October 23, 2006
Only five years ago, the United States exported more than double the amount of China. During the first half of 2006, Chinese exports of manufactured goods reached $404 billion compared to $367 billion in exports by the U.S. just in time for U.S. trade officials to announce their concern that China is pursuing policies aimed at giving its own firms an unfair advantage over foreign competitors. China's surging trade surplus this year, driven by continued increases in high-tech exports, poses a major challenge to the United States' global competitiveness and long-standing leadership in technological innovation, declares the Manufacturers Alliance/MAPI. If the issue is not addressed and the trade imbalance continues to grow "like the gallows," reports Manufacturing & Technology News then "sooner rather than later the markets will trigger the inevitable adjustment, with what will almost certainly be more grim financial reaping," said analysis prepared by Ernest Preeg, MAPI's senior fellow in trade and productivity. Although China's roaring economic growth slowed in the third quarter, during the first six months of this year China surpassed the U.S. as being the world's largest exporter. The economy grew a still-robust 10.4 percent in the July-September quarter from the same period last year, the National Bureau of Statistics said. Only five years ago, the U.S. exported more than double the amount of China. During the first half of 2006, Chinese exports of manufactured goods reached $404 billion compared to $367 billion in exports by the U.S. Perhaps with this in mind, some high-ups feel something shady is going on. On Friday, a U.S. trade official said that the U.S. is concerned that China is pursuing policies aimed at giving its own firms an unfair advantage over foreign competitors. "It's frankly looming large in our thinking about China right now," Deputy U.S. Trade Representative Karan Bhatia told Reuters before a trip to South Korea and China this week. "We are concerned that we're seeing signs that China, either through subsidies or through policies that favor domestic industries, (is) distorting the playing field in China" to the detriment of U.S. companies, the administration's top trade official for Asia said. For years, China imported large quantities of parts and components, and its cheap labor shops were used as a platform for final assembly. Yet the share of imported content "is not nearly as large as sometimes reported, and the share of Chinese value added is rising steadily," wrote MAPI's Preeg. Foreign firms manufacturing in China are buying more of their parts from local suppliers. Large companies are providing suppliers with training, technical support and systems for improving quality. If Chinese exports continue growing at their current pace, then Chinese manufactured exports will be more than double those of the U.S. in five years, Preeg noted. "This dramatic reversal defines the bottom-line challenge to U.S. export competitiveness." Bhatia told reporters he would press China to follow a more "rational" economic policy in meetings this week in Dalian, Shenyang and Beijing. Clearly, favoring domestic industries and seeing a profit is irrational unless the domestic nation of which we speak is the U.S., no? How often do we hear, "We must only buy 'Made in America' products"? But I digress. Perhaps it isn't just paranoia and an easy target to blame. A recent case brought before the World Trade Organization by the U.S., the European Union and Canada against China's tariffs on auto parts is "to some extent symptomatic" of a broader Chinese effort to shield its companies from foreign competition, Bhatia said. The WTO will likely soon establish a panel to rule in the auto parts case. China has made progress in resolving long-standing trade disputes with the U.S., but more needs to be done in a number of areas, Bhatia told The Associated Press on Friday. One big frustration for the U.S. is China's failure to lower its threshold for bringing criminal cases against companies or individuals who violate copyright and patent laws, he noted. Bhatia said the government seemed to be fulfilling some pledges and has made some progress in protecting U.S. intellectual property, such as an agreement to load legal software on all new computers sold in China. However, the country still needs to do much more to stop piracy, according to Bhatia. Further, the trade official said, the Chinese have been less forthcoming in other areas. In addition to the commitment on computer software, other commitments made by the Chinese included ways it planned to crack down on the sale of illegal, pirated computer software and expanding the opportunity for U.S. and other foreign firms to compete for Chinese government contracts. "We are looking, frankly, for speedy resolution in areas where they have made policy commitments," Bhatia said. Bhatia's trip is just the latest by administration officials seeking to show progress in dealing with the United States' ballooning trade deficit with China, which hit a record $202 billion last year and is on track to exceed that amount this year.