Trade Frictions in an Election Year

As the US presidential election approaches, China makes an attractive campaign target. The huge bilateral trade deficit (about $120 billion in 2003) and the loss of US manufacturing jobs (2.8 million since 2000) are perfect political fodder. The loss of manufacturing jobs is not new. Since 1950, the proportion of US jobs in the manufacturing sector has dwindled from about 31 percent to 12 percent. Other countries, including China, have also lost manufacturing jobs. But whatever the long-term global trends, jobs lost at home are an inevitable focus of political campaigns. And however much economists preach that bilateral trade balances should not be a policy concern, politicians easily put the blame for lost jobs on trade deficits. It's not surprising, therefore, that Treasury Secretary John W. Snow criticized China for an undervalued renminbi. Meanwhile, several Democratic presidential candidates advocate strict labor and environmental standards in trade agreements.

The reality, of course, is that both China and the United States benefit from rapid trade expansion, even though bilateral trade flows are nowhere near balance (nor should they be). Since its accession to the World Trade Organization (WTO) in December 2001, China has become America's third largest trading partner and the sixth largest market for US exports. US exports to China climbed by 71 percent over the last three years while US exports to the rest of the world declined by 10 percent. Meanwhile, Chinese exports of consumer and intermediate goods give American consumers the benefit of much lower prices.

But as trade expands, so do trade frictions. Since 1993 the US government has launched some 33 antidumping investigations against Chinese products. While all antidumping actions involve bizarre calculations, in the case of China there is a special twist, the "nonmarket economy" methodology. Under this approach, the US Commerce Department uses economic data from supposedly comparable market economies (like India) to guesstimate the cost of production in China. Almost always the result is high dumping duties.

The US government has also applied special safeguard measures against Chinese imports. Under the terms of China's accession to the WTO, safeguard tariffs and quotas can be applied solely against Chinese products; in the case of textiles and clothing, safeguards can be applied even when imports exert only a slight adverse impact on the domestic industry. Both provisions are at variance with the WTO's principle of nondiscrimination (which China agreed to waive as a condition of accession). In November 2003, the US government used the special safeguard provisions to curb the growth of Chinese exports of knit fabrics, brassieres, and dressing gowns. The US apparel industry complained that, since Chinese exports of these items soared from about $122 million in 1998 to $550 million in 2002, it was time to put on the brakes.

We can safely predict that the US textile and apparel industry will redouble its efforts to limit Chinese exports when the Multifiber Agreement (MFA) quotas expire in January 2005. According to the World Bank, when the MFA comes to an end, China will be able to increase its share of world garment exports from 20 percent in 2003 to 50 percent by 2010. Peering at such projections, the American Textile Manufacturers Institute (ATMI), the leading textile lobby, claims that Chinese textile and apparel exports will flood the US market and destroy up to 630,000 US jobs. The job loss numbers are exaggerated, but the direction of the political winds is clear. What the domestic textile industry neglects to mention is that China is a big importer of US fabrics and raw cotton. China is the sixth largest importer of US fabrics, and US cotton exports to China increased from $123 million in 1998 to $481 million in 2003.

US-China trade disputes are not limited to textiles and apparel. The US furniture industry is another big employer, responsible for about 1 million US jobs, and the industry is alarmed that Chinese furniture exports to the United States exploded from $169 million in 1999 to about $1 billion in 2003. At the US industry's request, in December 2003 the Commerce Department initiated the biggest antidumping case ever against Chinese wooden bedroom furniture imports, valued at slightly more than $1 billion. The lobbying group, American Furniture Manufacturers for Legal Trade, has asked for antidumping duties on Chinese imports ranging from 158 to 441 percent (the "nonmarket economy" methodology at work!), and the Commerce Department expects to make a preliminary determination in June 2004.

While furniture makers want to restrict Chinese imports, China is the largest and fastest-growing export market for US hardwood. Between 2000 and 2003, US hardwood exports to China jumped from $13 million to $47 million. The booming Chinese private housing market fuels domestic demand for furniture. IKEA, the world's largest furniture retailer, has already opened flagship stores in Beijing and Shanghai and expects to open another eight by 2010.

While these and other bilateral trade spats will probably escalate during election year 2004, China should not dismiss all US charges as politically inspired. The US Trade Representative has identified key problems in agriculture, intellectual property rights, and value-added tax (VAT) policies. Questionable sanitary and phytosanitary measures in agriculture, rampant piracy of intellectual property, and VAT rebates that subsidize exports have raised legitimate questions about China's commitment to WTO compliance. While China has removed or modified more than 2,200 trade laws to comply with the WTO, further action is necessary.

In 2004 and beyond, the right strategy for China, as it seeks to address and dampen trade frictions with the United States, should have three major components. First, whenever China thinks a US antidumping or safeguard case has flaws, it should vigorously contest the action, both through legal and diplomatic representation. Second, China should accelerate its liberalization of bulk agricultural commodities (feedgrains, cotton, wheat) so that farm communities across the United States will have a major stake in ensuring open trade between our two countries. Third and finally, China should form a strategic alliance with the United States to invigorate WTO talks and help the Doha Development Round live up to its name.