China-bashing continues, but it may be all bluster

VIEW FROM WASHINGTON

CHINA-BASHERS in the US Congress have cast a huge shadow over key economic talks here between the two giants this week.

Criticism of Beijing has been relentless since the Democrats took control of both chambers in January – and the intensity has been increasing over the past week.

Treasury Secretary Henry Paulson goes into the second round of the strategic economic dialogue tomorrow with a mission: to placate lawmakers threatening sanctions against China. Their anger has largely been directed at the yuan.

Many in Congress, who believe the Chinese currency is undervalued by as much as 40 per cent, accuse Beijing of not allowing its tightly managed exchange rate to trade freely or rise in value.

Indeed, they consider it a government subsidy and blame it for fuelling the huge US trade deficit with China, which swelled to a record US$233 billion (S$350 billion) last year.

As Mr Robert Zoellick, the former US trade chief and deputy secretary of state, noted: “The exchange rate has become a symbol today of whether the relationship is fair or not.”

Last Thursday, a bipartisan group of 42 legislators filed a petition to the US Trade Representative’s office. It called for
“strong action” against China’s “unfair currency manipulation”.

Beijing’s attempts to mollify Washington last Friday by allowing a slight widening of the trading band for the yuan did little
to appease American lawmakers.

“This is a nice gesture, but in the past, most gestures have not produced any concrete change,” said Senator Charles Schumer, one of the most vocal critics of China’s trade policies.

The timing of the talks could not have been worse because both China and the US are being held ransom by domestic considerations.

With the crucial Communist Party Congress taking place later this year, the Chinese will not want to be relenting too much to American interests.

US President George W. Bush, weakened by the war in Iraq, faces a bigger challenge dealing with a belligerent Congress.

Mr Kevin Nealer of the Scowcroft Group, a business advisory group, said this could explain why Washington and Beijing are approaching the dialogue differently.

“The tactics differ importantly,” he told The Straits Times. “The US is trying to manage down the risk of worst-case actions by Congress.

“The Chinese want to maintain a policy dialogue but avoid turning the dialogue into bilateral trade negotiations.

Mr Nealer, who advises the US intelligence community on trade issues, said that both countries recognise that these talks are loaded with unrealistic expectations.

The real objective is modest success. The two-day meeting could yield a few high-profile contract signings that include an airline pact and a significant opening of China’s financial services.

But they do little to appease Congress.

“If the talks are just window-dressing, Congress will be ready to press on with strong, veto-proof legislation,” warned Senator Schumer.

But China-bashing may all be bluster. With elections looming next year, it is a very popular play in American politics.

According to Stratfor, some of the biggest hawks have indicated that they have little desire to push through several punitive trade Bills against Beijing. Rather, they want to use them to shape China’s perceptions and its ultimate actions.

Moreover, Bills like a 27 per cent tariff on all Chinese-manufactured goods will hit US businesses, many of which finance congressional campaigns.

American consumers have also grown fond of low-cost imports.

Conceived as a “management tool” to deal with a range of issues with Beijing, the strategic economic dialogue is now afflicted by pressures which Mr Paulson describes as “short-term-itis”.

Mr Jeffrey Bader, who heads the China programme at the Brookings Institution, explained the Treasury Secretary’s dilemma: “Paulson sees this as a long-term process to encourage further Chinese economic reform. He wants achievementsalong the way to demonstrate its value.

“But the problem is that you are not going to get a great deliverable each time, and you have an impossibly high short-term level of expectations.”

The real danger is that Congress and other American interest groups have made the valuation of China’s currency the leitmotif of cooperation.

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