China proving lesser of two evils

CHINA is emerging as a ''reasonable man'', if not a regular ''good guy'', in Washington's trade picture - at least when placed in the context of America's recent global trade performance. Despite its continuing substantial surplus, the annual Most Favoured Nation (MFN) battle and America's monitoring of market access, China shows no signs of building excess upon excess in US trade. This should come as good news for those who will have to battle for a continuation of the country's MFN status under a cloud of conditionality next year. It is true that figures out last week from the US Commerce Department showed China's monthly trade surplus with the US increasing again in April, albeit marginally. The country's trade surplus with the US for April was US$1.49 billion - up from $1.46 billion in March - bringing its total surplus for the first four months to $5.7 billion. This four-month total is well up on the $4.5 billion recorded in the opening third of last year, but, compared to the increase in the global US trade deficit so far this year - especially in the last two months - and the higher Japanese surplus, the China picture is one of relative restraint. China's trade surplus with the US in April was equivalent to just over 14 per cent of the expanded US global deficit for the month, compared with Japan's 53 per cent share. For the first quarter and first four months of the year, China's surplus with the US was equal to 16 per cent of the total US deficit for the period, compared with Japan's 51 per cent. In addition, the combined Greater China surplus with the US - that is, Hongkong, Taiwan and the mainland - slipped to 23 per cent of the overall American deficit in the opening months of the year. This is down from the equivalent of a one-third share of the global US trade deficit over the whole of last year. There is no doubt that these are all substantial numbers in the overall context of America's global trade relations. However, the real problem for the US this year is not just that the deficits with Japan and China have widened, but that there has been a worsening in the trade balance with the rest of the world. In China's favour, the US has repeatedly emphasised that it is not so much concerned by bilateral trade deficits in themselves, but the continuation of deficits over a lengthy period of time. China has yet to accumulate a long record of surpluses, hence the substantial preoccupation of US trade officials on the country's trade relations with Japan. The US has also argued for greater access to markets - the subject of the Section 301 investigation of China last year and the object of talks (yet again!) between the US and Japan. On this issue, too, China still has time to prove itself. China also no longer has the problem of an overall global trade surplus to explain away, but Japan does. While China's monthly surpluses with the US continue to mount, the country's global trade picture has deteriorated this year, as imports have increased and exports have languished. The result is that, while the US may continue to express its concern over the bilateral China deficit, it cannot argue that the mainland market is not opening to imports. It clearly is, although the imports are not predominantly from the US, as the Americans would like to see. A problem for Beijing could emerge again, however, if the present attempts to cool the pace of growth in the mainland economy result in imports being choked off as the year progresses. This must be regarded as a very real possibility, especially with the country swinging to trade deficit this year with the increasing demand for imported, as well as domestic products. There is some evidence to suggest that China has swung some of its own production, which might otherwise have been destined for export to the domestic market, to accommodate increased demand. The country's total exports in the first quarter of the year, for example, were up 7.4 per cent from $15 billion to $16.1 billion, according to official figures out of Beijing. Yet, Chinese re-exports through Hongkong in the same period were up 19.2 per cent from $10.4 billion to $12.4 billion in the same period of last year. While comparison of these figures is not precise, they do suggest that exports, delivered from elsewhere in the Chinese economy, must be down on their levels of a year earlier. Meanwhile, the deterioration in the American merchandise trade account and the deficits with Japan and China say as much about economic developments in those countries as they do about the US. CRITICAL, from the US perspective, is the fact that even the slightest upturn in its domestic economy has brought increased imports from its major trading partners around the world. AT the same time, the slowdown in growth in the economies of America's major trading partners has dampened the prospects for US exports, despite the competitive value of the dollar. This is true of Europe, which now expects negative real growth this year, but it is also true of the country with which the US has had its longest and most serious trade battle - Japan. Indeed, it is because Japan and China provide such a stark contrast to each other in the US trade picture that there is likely to be more Washington pressure on Tokyo rather than Beijing. While the Chinese economy is still expanding rapidly - indeed overheating - the Japanese domestic market remains in a recession. This has, predictably, led to a substantial increase in imports into China the last six to nine months, while exports have shown only a modest increase over a year earlier. Japan, on the other hand, has seen its export performance enhanced at a time when its absorption of imports has dropped substantially, leading to a resurgent trade surplus. While in absolute terms, the US trade deficit situation is a long way from being as bad as it was in 1987, Japan's role in the country's trade deficit has increased substantially. In 1987, when the US deficit reached a record $152.1 billion, Japan accounted for $71.03 billion of the total, but that was equivalent to just 46.7 per cent of the global US trade deficit. Last year, the US global deficit was $84.5 billion and Japan accounted for almost 60 per cent of it. So far this year, the situation has improved slightly, with Japan accounting for a little over 50 per cent of the total US deficit. But it is easy to see why Washington's trade officials are only too eager to target Japan in their investigations of the deteriorating US trade situation. Of course, China's role in the US deficit shows an even more dramatic picture. It accounted for just 3.4 per cent of the US global deficit in 1987, while it stood at 21.6 per cent last year. But, because of the transfer of manufacturing capacity from Hongkong and Taiwan over this period, the ''Greater China'' trade deficit with the US, perhaps, gives a truer picture. ''Greater China'' accounted for the equivalent of 19 per cent of the deficit in 1987. Although this rose to a peak of 36 per cent in 1991, it was back to 36 per cent in the first quarter of this year.