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February 12, 2012

Trade central to Xi meet even if forex grabs spotlight

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February 12, 2012

WASHINGTON: The Obama administration must walk a tightrope on vital economic interests when it meets next week with China’s leader-in-waiting Xi Jinping.
The White House may seek to voice its currency complaints loudly in public but without alienating its biggest creditor or jeopardizing progress in opening up China’s huge markets.
American businesses are clamoring for more of China’s vast government contracts, worth at least $88 billion a year, and are fighting Chinese pressure on foreign firms to turn over their technology patents.
While no breakthroughs are expected before Vice President Xi assumes the leadership later this year, the meeting will be significant as a harbinger of US-China economic relations in the years ahead.
“Xi seems to have more charisma and personality, which is promising because chemistry is important,” said Matthew Goodman, a former White House adviser on international economics now at the Center for Strategic and International Studies.
“He comes from a background that suggests he may be more willing to pursue a reform agenda, but he is going to be constrained from giving anything of substance now.”
The harshest public scrutiny will fall upon whether the Obama administration talks tough in an election year to China about unshackling its managed currency. Trade unions and some American manufacturers argue that China keeps the yuan undervalued to give it an unfair export advantage that costs America millions of jobs.
Data on Friday showed the US trade deficit with China hit a record high last year of nearly $300 billion, likely feeding criticism from Congress that Beijing does not play by the rules.
Leading Republican presidential candidate Mitt Romney has said he would declare China a currency manipulator from Day One in office, a step that would open the door to US trade sanctions.
A bill that threatened to slap trade sanctions on China unless it revalued the yuan sharply made surprising progress

in Congress before stalling last year.
Two top US lawmakers intensified the pressure last week by urging the administration to raise the issue of China’s currency in March at the World Trade Organization, which is examining the relationship between exchange rates and trade.
President Obama already has toughened his rhetoric. Late last year he called on China to act like a “grown up” economy and stop “gaming the system”.
But for business, opening up China’s market and protecting its intellectual property is the immediate priority. This week, US prosecutors secured an indictment against a Chinese firm on economic espionage-related charges involving the alleged theft of industrial secrets from chemical giant DuPont.
China experts warn that when the two world powers meet next week, they should tread carefully over the currency issue. It might capture bold US headlines unlike complex trade issues, but risks angering China and damaging the broader agenda.
“Foreign exchange is not the key to resolving our issues or key to the future.” said Kenneth Lieberthal, a China expert at the Brookings Institution.
China is heading toward an overall trade balance this year, complicating the US charge that its currency policy is unfair. It allowed the yuan to rise by 4.7 percent last year and the slow pace of appreciation continues today.
Moreover, as China relaxes currency controls the yuan will start to challenge the dominance of the US dollar.
Eswar Prasad, Cornell University economist and a former China head at the International Monetary Fund, said in a study this week that within five years China probably will complete opening up its capital account, a crucial step toward a fully floating exchange rate, and over the next decade the yuan will start eroding the dollar’s position as the world’s premier currency.
Additionally, China’s leadership faces huge internal hurdles in implementing its five-year plan to reorient its economy toward consumer-led growth and away from export dependency.
“They have a complex set of challenges ahead. They must be viewed holistically and the currency should not be viewed in isolation,” said Stephen Roach, non-executive chairman of Morgan Stanley at a Brookings Institution seminar in Washington.
The currency meanwhile will test Xi’s dexterity when he meets with US lawmakers in responding to a politically sensitive topic, one that is likely to fade after the US elections in November. The United States likewise must weigh the risk that threats of trade sanctions could invite retaliation from its fastest growing major export market.
“It could come back to haunt us,” said Roach.
Over time, the currency issue will resolve itself. The hardest work lies in developing the trade relationship.
Under scrutiny at these meetings will be the progress China has made delivering on Chinese President Hu Jintao’s promises during his US state visit a year ago to delink government procurement from “indigenous innovation” policies that pressure US companies to transfer technology to qualify for sales.
China has taken steps but Bill Reinsch, president of the National Foreign Trade Council which represents major companies such as General Electric, Boeing Inc, United Technologies and Microsoft Corp, said it’s “not enough to produce a material change in the status quo”.
China’s State Council recently directed provincial and local governments to eliminate any remaining linkages between indigenous innovation and government procurement. China also issued new draft guidelines for its national catalogue of products considered innovative in response to concerns raised by US and other foreign business groups.
While the revised guidelines removed explicit linkages to government procurement and import substitution policies, American companies remain concerned.
The US Trade Representative’s office also notes that a range of discriminatory innovation preferences are now popping up outside of government procurement.
Whatever tweaks China makes to appease US demands have to be viewed against its “massive government subsidies for domestic industry and an ongoing clear commitment in national and sub-national policy to favor domestic champions,” one US industry official said, speaking on condition he not be identified.
In a related area, US companies are also irked that China still has not joined the World Trade Organisation Government Procurement Agreement, despite promising it would 10 years ago.
“This is the Chinese Year of the Dragon, but when it comes to government procurement, every year is the year of the snail,” said Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers.

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