Trade blows

Global economy: Trading blows

By Alan Beattie

Published: July 5 2010 20:29 | Last updated: July 5 2010 20:29

port of Oakland California

At last, the mountain moved. After months of subtle diplomacy from the US Treasury and not so subtle threats from Congress, China two weeks ago grudgingly gave its currency, the renminbi, a little more freedom to rise.

The exchange rate issue dominates a relationship that will shape the future of the world economy – the confrontation between the US, the economic superpower of the 20th century, and China, the rising industrial hegemon of the 21st. Washington, with occasional support from Europe and selected emerging markets, says Chinese currency policy unbalances the world economy and disadvantages foreign companies.

But even if the currency rises significantly, as the White House demands, the US still faces myriad challenges managing its trade and investment relationship with Beijing.

With discontent rising across American business, fuelled by incidents such as the Google China censorship spat, Washington is recognising to its intense frustration that it lacks the instruments to conduct international trade policy in a modern economy.

“China is distorting global trade and investment patterns with a web of state-sponsored industrial policies,” says Jeremie Waterman of the US Chamber of Commerce. “The tools the US government has are inadequate to cope with this interlocking web.”

The old-fashioned architecture of US trade policy largely reflects the metal-bashing economy of the past. It is predicated – as is the focus on the exchange rate – on its manufacturers competing head-on with Chinese companies, particularly in the American market.

The US has a panoply of “trade defence” instruments – antidumping, countervailing duty and safeguard measures – that allow it to block imports it deems unfairly priced, state-subsidised or flooding in too rapidly. One such tool was used in September last year to restrict Chinese tyre imports, provoking a storm of protest from free-traders.

But the goods to which the US applies such measures are mainly basic, low-margin industrial components in which American competitiveness is being eroded against many countries. The list hit with trade defence protection in recent months does not read like a tour of America’s economic future: drill pipe, phosphate salts, coated paper.

Francisco Sánchez, undersecretary for international trade at the Commerce department, notes such products cover less than 3 per cent of US trade with China. Yet because the industries are long established and often have powerful labour unions, they exert disproportionate control over trade policy. When China joined the World Trade Organisation in 2001, the negotiators’ focus was on goods such as these, and particularly the eternally controversial area of garments and textiles.

Business and Beijing

Foreign companies complain that...

●Counterfeiting and piracy of products from pharmaceuticals to DVDs to mobile phones remains rife, with inadequate punishments

●Laws protecting intellectual property of foreign companies are hard to enforce, with inexperienced and sometimes biased courts

●Unique technical standards such as Wapi, China’s version of Wi-Fi, have been adopted to favour domestic companies

●Domestic bidders are favoured in contracts in areas such as
wind-power technology

“When China joined the WTO, the US and Europe put huge amounts of effort into keeping Chinese clothes out through negotiating multiple layers of trade defences,” says Gary Horlick, a leading Washington trade lawyer. Now these measures “are becoming not just an irrelevance but a distraction”, he says. Time and political capital are expended pursuing trade policies irrelevant to most American companies.

As China’s domestic market has rapidly grown, US and European companies have become increasingly interested in locating production there – and particularly in selling services such as telecommunications, information technology and media. But many are struggling. Beijing, under the rubric of its “indigenous innovation” policy, is instituting what foreign companies say is a complex system of skewed government procurement, unfair and arbitrary licensing policies and forced technology transfer that violates intellectual property rights (IPR).

Mr Waterman traces the policy back to 2002, when China had finally joined the WTO. “Once the negotiations had ended, those elements who preferred a stronger role for government were freed up,” he says. “The Hu-Wen government from 2003 inherited an economy where they saw few [Chinese] companies in high-wage sectors and in IPR-dependent industries, and set about trying to change it.” The gigantic $568bn fiscal stimulus Beijing announced in November 2008 gave them more ammunition to direct industrial development with government procurement.

Beijing says it is merely trying to do what other countries have done – modernise its economy, ascend the value chain and ease away from dependence on foreign companies for investment and technology.

But US companies say “indigenous innovation” goes way beyond familiar problems with software and movie piracy, and amounts to a full-blown system of government manipulation of large swaths of the economy.

Procurement is used to favour Chinese companies. Idiosyncratic technical standards such as a home­grown wireless technology – “Wapi” – are given a clear run by denying licensing to more familiar international standards. Information, communication and technology companies complain about restrictions, such as requirements for products to be certified and tested in government laboratories, and for businesses to disclose source code.

Alarm about this is rising to the point where business representatives are increasingly prepared to criticise policy publicly. “We are feeling less and less welcome in China, which is why you are seeing more people speaking out and reconsidering their futures in China,” says John Neuffer of the Information Technology Industry Council.

Last week Jeffrey Immelt, chief executive of GE, expressed his growing concern about Beijing, telling an audience of Italian executives that “I am not sure that in the end they want any of us to win, or any of us to be successful”.

The menu of options available to cope with such problems is limited. The most obvious is litigation at the WTO. Here the US has had some, but not spectacular, success. In 2004, in its first complaint against China, it forced Beijing to remove preferential treatment for local semiconductor producers; in 2008, it won a case against Chinese rules on car parts. More recently it was successful in two landmark cases – one on enforcement of IPR and one on restrictions on the domestic distribution of films and books. It is currently considering a case over restrictions on foreign credit cards.

But this strategy costs time and effort, and is not a cure-all. After the two or three years it can take to bring and win a case and an appeal, the remedy often comes too late. In the car-parts case, US business experts say, the delay gave Chinese industry more time to develop and American industry to weaken, foiling the goal of allowing US car-parts companies export significant quantities to China. Mr Neuffer notes that dispute settlement is even slower for high-tech industries, where product lifecycles can be less than a year.

Scott Lincicome of White & Case, a Washington law firm, says WTO litigation is one of the more attractive options, especially as Beijing has started to accept it as a normal part of trade relations, not a declaration of war. But it has drawbacks: “On issues like IPR there is very limited case law, and governments are very reluctant to bring cases unless they are fairly certain they will win them.”

The fact that much of what China is doing falls outside normal WTO agreements presents a wider problem. The prospect of changing this in the medium term, with the Doha round of global trade talks in limbo, looks bleak. Indeed, Michael Punke, US ambassador to the WTO, complains that Chinese negotiators are not even engaging seriously in talks.

There are no strong rules about promoting competition in markets in WTO agreements. There is an agreement whereby governments commit to put public purchases of goods and services out to international tender but China has never signed.

“Government procurement in China is actually much more important to the American and European economies and companies [than issues such as textiles], but much less effort was put into getting China to join,” Mr Horlick says. China says it will make an offer to sign up this month but appears to have ruled out including regional and local government and state-owned enterprises, thus punching huge holes in any new commitment.

Debbie Stabenow, Democratic senator from Michigan, has proposed a bill that would cut China off from US government procurement if it does not open its own market. But few investors seem to think that would make a tremendous difference. Rules such as the “Buy American” provision already restrict China from bidding for some government contracts, against which Beijing has in turn complained.

In theory, companies could try using bilateral investment treaties – which prevent host governments maltreating foreign investors – and argue that Beijing’s actions are in effect expropriating their investment. But the US does not have a tradition of signing such treaties, and an investment pact Washington was negotiating with Beijing has been put on hold pending a US review.

This leaves companies and the government having to rely on suasion through regular contacts, including the annual official strategic and economic dialogue.

Private US business associations say that in cases involving product standards, Beijing will often announce a restrictive policy and then retreat after an outcry from foreign business groups.

Tim Stratford, a former assistant US trade representative, now at the law firm Covington & Burling in Beijing, says that China is susceptible to some political arguments. “You can make the case that most countries behave in a particular way and China is placing itself outside those norms,” he says. “Or you can argue that China will lose support from other countries if it acts this way.”

But at the moment, he says, a mutual lack of trust hampers the resolution of a wide range of issues. A fundamental mismatch of expectations, it appears, is the real problem currently bedevilling relations.

What China sees as legitimate tools to promote its economic development are regarded in Washington as abuses of state and market power, and it is becoming painfully obvious that the US lacks the power to correct them.

One thing is clear: the temporary resolution of the currency problem has not ended the friction in trade and economic relations between the US and China.

Revaluing the renminbi

Do not expect a rapid rise, says Beijing

If the first goal of China’s decision last month to abandon its currency peg to the US dollar was temporarily to blunt international criticism, then it looks like mission accomplished, writes Geoff Dyer.

While the Canadian summit of the Group of 20 leading nations in late June looked, in the build-up, as if it might turn into a bash-China session, Beijing’s announcement the week before that it was changing policy took the issue off the table in Toronto. The administration of Barack Obama, meanwhile, notched up the change of heart as a victory for behind-the-scenes diplomacy. The risk that the currency dispute would descend into a trade war has, for now, disappeared.

Yet how the policy will evolve is much less clear. Two weeks after Beijing ended the dollar peg and adopted a more “flexible” exchange rate policy, the renminbi has appreciated only 0.3 per cent against the dollar. So far the economic impact of the policy shift has been limited.

Indeed, during the past fortnight, Chinese officials have gone out of their way to stress that any changes in the exchange rate will be anything but dramatic. Speaking at a financial forum in Shanghai 10 days ago, Xie Duo, director of the financial markets department at the People’s Bank of China, ruled out any significant increase in the value of the currency. “Given the decline in our current account surplus, there is no foundation for a sharp rise in the renminbi,” he said.

“China’s currency reform will be gradual,” said Jiang Yaoping, a deputy minister at the commerce ministry, which had run a campaign to prevent the lifting of the peg. “Any accusations that China is manipulating its currency are groundless.”

Li Daokui, an adviser to the central bank, told the same forum in Shanghai that this “is different from the reform in 2005”, after which the renminbi appreciated gradually against the dollar; today, there could be “two-way” movement.

There is an element of politics to some of this public posturing. Beijing is desperate to avoid the impression that it is giving into foreign pressure, which would be the conclusion at home if the renminbi appreciated strongly straight away. The important thing, some observers say, is the trend in the exchange rate, rather than the short-term rate of change.

But slow appreciation against the dollar could revive criticism in the US that China is gaming the trading system, especially as midterm elections approach. The key, says Ben Simpfendorfer at RBS in Hong Kong, is the crisis in Europe, China’s biggest export market. If the euro stabilises, China could yet allow the renminbi to drift higher against the dollar. But if the euro weakens further, he says, the political tensions with the US could easily return.

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