Opportunity or threat?
news.ft.com
By Edward Alden
Published: November 3 2003 20:11 | Last Updated: November 3 2003 20:11
Donald Manzullo, a US congressman from Rockford, Illinois, carries in his briefcase a black US Army beret with a "Made in China" tag. Another 614,999, he will tell you proudly, are being eaten by moths in a warehouse of the Defence Logistics Agency in Mechanicsburg, Pennsylvania.
Two years ago, Mr Manzullo read in a newspaper that the Pentagon was bending US procurement laws to buy cheap berets from China rather than from US suppliers. He pasted the article on what he calls his "mad board", a list of "the things that I get really mad about". Using his position as chairman of the House small business committee, the Republican forced the Pentagon to cancel the contract.
But Mr Manzullo is still mad at China. His Illinois district has dozens of small manufacturing companies and he blames China for the downturn that has led to nearly 2.8m manufacturing jobs disappearing in the US in the past three years. China, he says, represents a "huge threat" to the jobs that remain. Last week he co-sponsored a successful House resolution calling on China to open its market more rapidly to US imports and to adopt flexible exchange rates to relieve the pressure on US manufacturers.
Mr Manzullo speaks for a growing number of Republicans and Democrats who are urging the administration of President George W. Bush to get tough with China over its burgeoning trade surplus with the US, which is on track to reach about $125bn this year. Half a dozen China trade bills have been introduced in Congress; the most severe will impose tariffs of up to 27.5 per cent on Chinese imports if Beijing does not take steps to revalue the renminbi, which is pegged to the US dollar. Most of the nine Democrats campaigning for president have charged that the government's failure to get tough with China and other trading partners has accelerated the loss of manufacturing jobs.
With the presidential election just a year away, the Bush administration has at last responded, sending officials to Beijing to warn that Washington may curb Chinese imports unless China takes steps to redress the trade imbalance. Donald Evans, the US commerce secretary, said last week: "Our patience is wearing thin. The American market will not remain open to Chinese exports indefinitely if the Chinese market is not equally opened to US companies and American workers."
But, like the US relationship with China, Mr Manzullo's position is much more complicated than would appear. In between bashing the Chinese, he heads the US-China Interparliamentary Exchange, travelling regularly to meet Chinese lawmakers. He has championed the reform of US export control laws that block the sale of many high-technology goods to China, harming machine tool companies in his congressional district. His district, he notes, is the third biggest supplier to Boeing, the aircraft-maker that is the largest single US exporter to China. And he supports efforts by US multinationals operating in China to change new US visa rules that have made it much harder for Chinese buyers to travel to the US.
Supporters of US engagement with China have long argued that ensnaring the communist nation in a web of economic ties with the US would force Beijing to curb its hostility towards Washington. But the effect has been at least as strong the other way: the US economy is now so enmeshed with China that the growing threats to get tough on the country will almost certainly prove hollow.
"The administration is trying to look a lot tougher here for the American voting public than it has any intention of being on the Chinese," says David Lampton, director of China studies at the Johns Hopkins school of advanced international studies. "It makes good political sense but it makes no economic sense."
The rise of China as a leading exporter has touched off a crisis of confidence in some sectors of the US economy not seen since the 1990s, when Japan temporarily seized leadership of the semiconductor and car industries. US imports from China have grown from $15bn in 1990 to $133.5bn last year, mostly in manufactured goods, while China has become the largest single market for US foreign investment, further displacing US workers.
Japan pioneered production methods and forms of government/industry co-operation that forced many US manufacturers to restructure their own operations dramatically to remain competitive. China's combination of high quality and low-cost labour has similarly forced some manufacturers into a new round of soul-searching.
The effects have been most pronounced in smaller manufacturing businesses with little capacity to move labour-intensive operations offshore. Eight US companies that make nails, for instance, have gone out of business in the past three years; from 2001 to the first half of 2003, imports of Chinese nails grew by nearly 120 per cent. Small manufacturers of tool-and-die equipment, chemicals, furniture and textiles tell similar stories.
The Commerce Department will shortly complete a detailed report based on nearly two dozen meetings held across the country with US manufacturers. The highlights are already known: the administration argues that reducing costs to help smaller manufacturers compete would require a host of policy changes, from ending frivolous lawsuits to passing energy and healthcare reform.
But, with Congress bitterly divided over such measures, China has become the easiest target. At a hearing of the Senate banking committee last week, senators accused China of trading unfairly. "We're all exasperated here," said Senator Charles Schumer, a New York Democrat. "We see China thumbing its nose at what's fair. We see thousands of jobs lost." Senator Jon Corzine of New Jersey, a former chief executive at Goldman Sachs, warned that if nothing were done, "protectionism is going to gain root in this country".
The last time that happened in the US was during the 1980s. President Ronald Reagan, a Republican whose rhetorical commitment to free trade exceeded even Mr Bush's, imposed more import protection than any president since Herbert Hoover. Japan, hit with 100 per cent tariffs on computer and television exports to the US and 45 per cent duties on motorcycles, was forced to negotiate "voluntary" export restraints on cars and steel.
But Mickey Kantor, the former US trade representative who once threatened to impose 100 per cent tariffs on Japanese luxury car imports, says China is nothing like the Japan of the 1980s, which engaged in "outright discrimination" against US imports. In contrast, he says: "China's imports are increasing at an ever more rapid rate, not only from the US but from [South] Korea, Japan and elsewhere."
US exports to China have grown far more quickly than to any other market in the world since 2001. In the first six months of this year, US exports to China were up 22 per cent compared with a 3 per cent rise in sales to the rest of the world. Japan's overall imports still represent just 8 per cent of its economy; China's imports this year will exceed 30 per cent of gross domestic product, making it the world's third largest importer after the US and Germany. The biggest beneficiaries have been China's Asian neighbours, which have given no support to Washington in its effort to raise the heat on China over trade.
Despite the congressional rhetoric, support for trade action against China is similarly thin in the US. While small US manufacturers see mostly a threat from China, larger manufacturers - as well as US farmers, banks, insurance companies and other service providers - see opportunities.
US multinational companies that have heavily invested in China carry huge political weight in Washington. The business coalition that persuaded Congress in 2000 to grant permanent normal trade relations to China comprises hundreds of companies that are the largest political contributors to members of Congress.
Mr Lampton says that such companies think the current furore over China will come to naught. "The big companies are very sensitive to the bad publicity of being perceived as siding with China against the US government," he says. "The safest course is to say nothing, because nothing is likely to happen."
The Bush administration itself appears to have little interest in taking on China; and every harsh word aimed at Beijing has been balanced by conciliatory remarks. The administration's own analysis is that trade with China has been overwhelmingly beneficial to the US and is only marginally to blame for weakness in the manufacturing sector. Gregory Mankiw, chairman of the White House Council of Economic Advisers, told a House committee last week that the biggest international problem for US manufacturers has been the 10 per cent fall in exports over the past three years. Imports have remained flat, with China largely displacing goods from other countries. "Without China, US export growth would have been even slower," he said.
Apart from falling exports, he said, most of the manufacturing job losses have been due to the fall in domestic business investment. The five industries that have lost most jobs - computers, machinery, transport equipment, fabricated metal products and semiconductors - are "export-intensive industries for the US where imports from China are low" (though computer imports from rose by 42 per cent from 2001-2002).
Critics say that Washington needs to look inwards to understand its China problem. For instance, the US maintains a host of export control restrictions on advanced manufacturing goods designed to prevent the Chinese from acquiring technologies that might be useful militarily. China has responded by purchasing the same goods from other countries. "Chinese importers find the US an extremely difficult and unpredictable supplier of machinery and equipment to meet its needs for the country's booming investment," says Fred Hu, managing director, Asia investment research, for Goldman Sachs Asia. He says that, with so much uncertainty, "orders naturally shift to Europe, Japan and South Korea".
The greatest danger of a backlash against China comes from the fact that the US is entering an election year. "My great fear is that early next year Karl Rove [Mr Bush's chief political strategist] will tell the president, 'It's time you joined the China-bashers'," David Hale, a Chicago-based economist, told a forum of Asian business leaders last month. "If George Bush does join the China bashers, we're all at great risk."
But Mr Bush last week rejected his best opportunity to go down that road. The Treasury department, resisting congressional pressures, refused to issue a determination that China had engaged in currency manipulation to hold down the value of the renminbi. Such a finding, under the 1988 trade law that was passed at the height of anti-Japanese fervour in Congress, would have required the US to begin formal negotiations with the Chinese over currency values.
Instead, the US has already made clear that its focus will be on getting China to comply with its myriad obligations under the World Trade Organisation - the one issue on which the US corporate sector can readily agree. The administration has yet to bring a WTO dispute settlement case against the Chinese, arguing that more progress has been made by quiet, bilateral negotiations. But, to assuage Congress, the US will almost certainly have to launch a case before the election. US officials have suggested that China's tax rebates to domestic manufacturers and its pirating of US software are two possible targets.
The most difficult decision will come later this month when the administration must decide whether to impose tariffs on some Chinese textile imports under a special "safeguard" provision that was part of China's agreement to join the WTO. The provision allows for temporary tariffs in the event of a surge of imports from China, and overall Chinese textile and clothing imports from China more than doubled in 2002. Last week 165 members of Congress, both Democrats and Republicans, called on Mr Bush to trigger the safeguard. In an election year, that will not be easy to ignore. |
