Trade skirmish aims to avoid all-out war

PUBLISHED : Wednesday, 11 April, 2007, 12:00am
UPDATED : Wednesday, 11 April, 2007, 12:00am

Do not expect the surprise fall in the mainland's trade surplus last month to dampen friction between China and the United States. Tensions between Washington and Beijing look set to escalate.

With luck, however, a little skirmishing may be just what is needed to avert an all-out trade war.

At first, the drop in China's March trade surplus to US$6.9 billion from US$23.8 billion in February raised hopes of an easing in trade tensions. On closer inspection the fall turned out to be an anomaly.

Eager to get in ahead of March's cuts in value-added tax rebates on exports, Chinese companies had rushed to fill export orders during January and February. The distortion bumped up the size of the mainland's surpluses in the first two months of the year and exaggerated the magnitude of the subsequent drop.

A glance at a three-month moving average of the mainland's trade balance shows the country still ran a phenomenally high surplus in the first quarter, almost double the size of the same period last year (see chart).

In any case, March's data came too late to prevent trade tensions ratcheting up another notch. On Monday, the US administration announced it was filing two complaints against China at the World Trade Organisation over copyright violations and barriers to imports of films and books.

Washington's action came on top of an earlier WTO complaint about export subsidies filed in February and last month's unilateral decision to slap punitive duties on imports of glossy paper from China. Beijing warned that the latest move would severely damage trade relations.

Maybe, but the alternative could be far more destructive. Members of the US administration are reluctant trade warriors. They are keener on engagement with China than confrontation and appear to have taken their recent actions largely to placate a more belligerent Congress.

Many in the US Congress favour more forceful action against China on trade. Concerned that the low valuation of the Chinese yuan is destroying American jobs, some US politicians are threatening retaliation unless the mainland immediately allows its currency to appreciate.

In testimony last month, Morris Goldstein, senior fellow at the Peterson Institute, told senators that the yuan was 'grossly undervalued' against the US dollar by 40 per cent or more.

To prove good faith, China should immediately revalue the yuan by between 10 and 15 per cent, he said. Failure to act should result in the country being labelled a currency manipulator by the Treasury, which would open the way for full-blown trade sanctions. There are mutterings in Washington about reviving a bill that would slap a 27.5 per cent tariff on all Chinese imports.

That would be a disaster, but there is no way Beijing is going to allow itself to be pushed into a politically unacceptable and economically damaging revaluation. Equally concerned about jobs, nervous Chinese policymakers are already allowing the yuan to appreciate as fast as they dare.

Officials in Washington understand this, but applying extra pressure through targeted trade actions does little harm. And even if the latest complaints do nothing to bolster intellectual property rights or to open China to foreign film distributors, they will still do some good if they help to cool the hotheads in Congress.