The U.S. and China: A Troubled Trade Relationship

by Naman Patel

June 22nd, 2016

    In a March 2000 press conference, then-President Bill Clinton extolled the virtues of added trade with China. Specifically, he reiterated his case for why the United States should support China’s re-entry into the World Trade Organization. U.S. economic growth, he opined, required “new markets for American products and services around the world” and permanent normal trade relations with China would accomplish just that. President Clinton believed that the addition of China to the WTO would necessitate “no further action on our part to lower tariffs or open markets.” Rather, “all the concessions are being made by China.” Lawmakers in the United States, President Clinton in particular, were pinned to the belief that China’s inclusion in the WTO would further open the window to U.S. exports by hastening efforts by the Chinese to liberalize their markets.

    It’s been a decade-and-a-half since China joined the WTO, and, while trade volume between the U.S. and China has increased significantly, market liberalization has been but scant. In spite of China’s large cuts to its tariffs regime, it continues to distort the market in order to provide its domestic companies with an unfair trade advantage in the global marketplace. Namely, it has used currency manipulation and dumping to prod domestic growth and buoy ailing industries, thereby crippling U.S. companies engaged in free trade. While a nation’s control over its own currency is a sovereign right, historically these tactics have been used solely to gain an international advantage during major economic crises.

    Last August, the Chinese government announced it would endeavor towards a market-based floating exchange rate. Yet, not long after that announcement, the government backtracked on its statement and decided that though it would slacken its hold on the yuan, a truly floating exchange rate was off the table. In January and again in May of this year the Chinese government dipped into its foreign currency reserves and devalued the yuan, bringing the currency’s reference rate to its lowest in five years. Indeed, interviews of Chinese officials, conducted by the Wall Street Journal earlier this year, found that the central bank is ready to forgo a market-based exchange rate. The Chinese policy of devaluing the yuan in order to prop up economic growth during a slowdown is unscrupulous and unbefitting of an economic and political superpower. It doing so lessens marketplace competition by making U.S. exports to China less attractive and reducing the cost of Chinese exports to the U.S. In turn, economic activity and employment moves from U.S. sectors to China.

    Most recently, in response to the drop in prices for basic materials, China has began to heavily and illegally subsidizing weakened industrial sectors, leading to an influx of cheap Chinese imports in the U.S. and elsewhere. The tactic, also known as dumping, allows Chinese firms to sell goods at prices below production costs and gain market share in the U.S. This is most notable in the steel industry, where subsidies have allowed Chinese firms to overproduce and sell steel in the U.S. at anywhere between 20%-50% below market prices. John Ferriola, CEO of Nucor Corp, estimates that Chinese dumping in the steel industry has cost about 15,000 U.S. steel jobs over the past year-and-a-half.

    Earlier this June U.S. Treasury and State Department officials visited Beijing to discuss, among other things, bilateral trade issues; they left Beijing with more of the same futile promises. Donald Trump, the likely Republican presidential nominee, has repeatedly brought forward the issue of illiberal Chinese trade policy. While his remedies to this problem seem to be dangerously simpleminded, it is clear that this is a matter the U.S. can no longer ignore. After 15 years of WTO membership, China has failed to transform itself into a market economy. It is now incumbent upon our politicians to push forward mechanisms that discourage unfair Chinese market interference, lest American jobs and companies continue to suffer wrongly.

 

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