On the Manifestations and Origin of Sino-U.S. Trade Disputes

Ma Yu

Recently, frequent clashes over trade between China and the United States have occurred. These trade disputes include issues surrounding the exchange rate of the Chinese currency, the Renminbi (RMB), the restrictions imposed on three types of Chinese manufactured textile products bound for the U.S. market, and the U.S. anti-dumping actions against color TV sets and furniture made in China. They involve a wide range of areas, with far reaching implications, and have thus attracted extraordinary amount of attention from all sides. This phenomenon is unprecedented in recent years, signaling the coming of a new, sensitive era of Sino-U.S. economic and trade relation. How we correctly understand this phenomenon and how we take the initiative and encounter this threatening situation with aplomb will test our capability to cope with international trade disputes, as well as to demonstrate our wisdom in coordinating domestic developments with international affairs.

Between China and the United States, a consensus has been reached that the Sino-U.S. economic and trade relations are vitally important to both countries. The United States is China’s largest or second largest trade partner in the world, constituting China’s largest export market, with an annual volume of exports valued at about $100 billion; on the other hand, China is one of America’s primary trading partners as well, constituting the fastest growing market for American export. The United State is also one of the chief sources for China’s foreign investments. Since 1999, the Americans have invested over $4 billion in China every year.

However, for many years, there have always been trade disputes between China and the United States. Especially since the 1990s, the frequency and scales of these Sino-U.S. disputes have rapidly increased, several of which almost brought the two countries to the verge of a trade war. Yet, economic and trade engagements between China and the United States have become closer and more intertwined despite the unstable, or more accurately, the dangerous, trading environment. This is clearly reflected in the fast increase in trade volume and the changes that have taken place in trading structures.

We can illustrate this phenomenon by using the example of the U.S. efforts to impose export restrictions on China’s textiles products, which may shed light on the true nature of this problem.

From a technical perspective, the U.S. restrictions can hardly make sense. However, the way the Americans do things dictates that there are always some justifications for this. This time, their justification is found in the negotiated agreement China signed in order to enter the World Trade Organization (WTO) and the special measures protecting textiles goods that have been incorporated into America’s trade agreements with China. However, if we think about it a little more carefully, we can easily see that the American justifications can hardly hold water. The charges the U.S. have launched against China that the Chinese exports have “disrupted the market,” and “caused reduction of production by the American domestic factories” do not have evidence to substantiate. In particular, they cannot prove that there is a necessary connection between the drop in production by the American factories and the import of textiles goods from China. A simple problem is that even if there were no Chinese imports, the American factories’ ability to compete would not increase, in which case, the American factories would still not be able to compete with imports from countries such as Mexico and Thailand.

The United States itself has provided an excellent example for this argument in the case of its steel industry, which has been protected for many years. But such protection did not prevent the American steel industry from getting into trouble. In fact, many Americans have pointed out that precisely because of the protection, the steel industry in the United States lost its ability to compete. Comparatively, in a labor intensive industry such as textiles, with the existing high level of wages in America, it is impossible for the U.S. textile industry to be competitive. Relying on protection cannot revive an industry. The obvious consequence of protection would be the “hidden bills” the American consumers would have to bear as a result of these textile import restrictions, which would not stop the trend of the American textiles industry from going downhill anyway.

The Americans, who have always been championing free trade and are always pragmatic, of course can not ignore such simplest and most evident fact. But why did they still impose such restrictions on Chinese textile imports? We can answer this question from another perspective, i.e. restrictions of this type (not just limited to textiles against China this time) are inevitable and normal occurrences. They take place because of some American factors, and some Chinese factors, with all of them interacting with each other to cause these protective actions.

From the American perspective, to save a few sunset enterprises within a sunset industry is the immediate objective; but it is absolutely not the main purpose. Haven’t we heard of the United States saying that it was the Chinese imports that had caused the unemployment of 2.7 million American workers? Since the U.S. can not possibly ban all of the Chinese imports to solve its unemployment problem, it has to take a symbolic gesture. Even if only a few hundreds of job opportunities were provided, it would be sufficient to prove that the labor unions, business associations, government and President Bush himself are taking this matter seriously, are taking actions and are effective. This is the secret of life’s success in the United States; it is also America’s politics. We can clearly see this pattern from the policy discrepancies between the presidential campaign rhetoric and the actual policies toward China after the elections, as demonstrated by Ronald Reagan, George Herbert Bush, Bill Clinton and George W. Bush. If we take a moment to recall the history of various trade disputes between China and the United States over the years and do some thorough analysis, we can easily reach the same conclusion. Furthermore, there are deeper considerations concerning national strategies, which have been clearly reiterated by various American presidents when stressing the necessity for an engagement policy with regards to China.

Moreover, even from a purely economic perspective, the Americans are not just hoping for some trinket benefits in such a disputed area. Instead, they desire for other benefits, such as expanding export to China for their goods of superior quality, and to obtain even more investment opportunities. This has been the general rule of any trade war, which has been followed with great skill and efficiency in a country such as the United States. Therefore, even when a Chinese purchasing delegation had just ordered American goods worth more than $6 billion, and intended to buy more, the Americans were still not satiated and still said, “we still have a trade deficit of up to $100 billion!”(According to American statistics, for the year of 2002, China enjoys a trade surplus against the United States of more than $100 billion. For 2003, it is expected to reach $130 billion. However, our [Chinese] Customs statistics point to a trade surplus against the United States of only $42.72 billion). Is the RMB going to rise in value? Will the RMB’s exchange rate change? Why don’t China’s industries such as banking and telecommunications go faster toward opening doors to the American enterprises? American companies such as AT&T, Chase Manhattan are already waiting for too long and have become “impatient.” Shouldn’t China’s Intellectual Property Rights (IPR) protection be further enhanced? Microsoft Inc., Hollywood and those manufacturing companies have been “complaining” all along. Poor thing! None of these problems, either economic or systematic by nature, can be solved in a short term. None of them can be compensated for by a few more Chinese purchasing delegations. Therefore, trade disputes such as the current one on textiles are nothing strange. If we think the Americans are ungrateful and excessively demanding after we have spent much buying their goods, we are indeed naïve.

On the Chinese side, however, there are also some problems. Specifically, the management strategy of our enterprises is flawed. Business associations cannot function effectively, providing the Americans with excuses, or we failed to prevent disputes from taking place. For example, too many companies of similar nature crowded the same market, making market rapidly saturated, thus failing to diversify to avoid trade risk, as prominently demonstrated in China’s export of color TVs to the United States. On a macro level, our strategy for foreign trade has room for improvement. Up to this date, we are still carrying out a policy of export-heavy strategy. That is to say, we encourage exports but restrict imports, causing a huge trade surplus. This of course will necessarily lead to frequent disputes with our main trade partners. In addition, we have some institutional problems as well as problems in specifically implementing trade policies, rendering us unable to timely let go of the pressure from trade disputes, which in turn enlarges or aggravates the problem—examples of which include our “the more the better” policy with regard to foreign currency reserve, and our chaotic market order.

In sum, the trade disputes between China and the United States are not only economic and trade problems between the two countries. They also are related to political and systematic issues in the two nations. To solve them will accompany bigger difficulties. But there are several conclusions that should be apparent. First of all, the trade disputes between China and the United States are inevitable, and will continue to exist for a long time to come. But they will not damage the fundamentals of the economic and trade relationships between China and the United States. There will not be large-scale, devastating trade wars, because a positive development of the Sino-U.S. economic and trade relationships are mutually beneficial to the national interests of the two nations. There is a consensus on this point from the two nations’ leaders to their business community and to their public. Stronger communications, more consultations and frequent exchange of information should be conducted between the two governments. Trade disputes should be solved according to international regulations, bilateral agreements and mutual interests. Both sides should display more honesty and tolerance, working toward dissolving, not aggravating, the problems. The trade imbalance between China and the United States is a reality that has existed for a long time. It is a natural consequence of international division of labor, compatible with the basic law of international distribution of resources. This imbalance may not be reversed at least for the next ten years. The two governments can only go along with it, but not deny or even work against it. At the same time, in years to come, while continuing its policy of reform and opening up to the outside world, the Chinese government should re-adjust its investment and trade strategies, speed up the process of opening up its domestic market and investment market, reform governmental management system and style, enhance transparency, standardize rules for competition, and endeavor to reduce the institutional factors that are causing trade disputes.

[Source: Ma Yu of the Research Institute at Ministry of Commerce, Chinese Economic Times (zhongguo jingji shibao), 1 December 2003, http://www.china.org.cn/chinese/OP-c/452411.htm ]