Can Treasury Secretary Henry Paulson defuse rising protectionist sentiment in Congress? The answer might be clearer this week when top officials from China and the United States, including Paulson and Federal Reserve Chairman Ben Bernanke, meet in Washington, D.C., for the second "strategic economic dialogue" about trade troubles between the two nations. America's huge trade deficit with China-$232 billion last year-is sure to top the agenda, with Paulson pushing for a stronger yuan, a more open market for U.S. goods and services, and greater intellectual property right protection. If he fails, Congress might push for duties on Chinese exports to America. To help sort out what might come from the get-together and what it means for America-China economic relations, U.S. News chatted with trade expert Gary Hufbauer of the Peter G. Peterson Institute for International Economics in Washington, D.C. Hufbauer is coauthor of U.S.-China Trade Disputes: Rising Tide, Rising Stakes.
For the White House, is the point of this meeting economic or political?
It's an attempt to sweep all the various trade issues and all the other economic tensions into one basket and then to get high-level attention on that basket. But it has the other purpose, which is to try and be able to tell Congress, "Look, we're making progress; don't pass any aggressive legislation," but at the same time, be able to tell the Chinese, "Look, if we don't make progress, Congress will pass aggressive legislation."
Has more chatter between the two nations on trade made any real difference so far?
It's hard to name visible accomplishments. The Chinese did introduce a small measure of flexibility on the exchange rate. And you could say part of the payoff is good Chinese cooperation on North Korea. But on the big bilateral economic issues, there has not been enough to satisfy Congress.
Is this the last chance?
Secretary Paulson is going to take [chief Chinese trade negotiator] Madame Wu up to meet some congressmen who are fire-eaters-she'll definitely get to meet with [Sens. Charles] Schumer and [Lindsey] Graham-and all these people who have got bills, and I'm sure they will not pull any diplomatic punches. They'll be pretty direct in their insistence that China's gotta move.
If China let its currency freely float higher, would that really make much difference in the trade deficit?
No. We have estimated that if China moves a lot on the exchange rate-like 20 percent-and other Asian countries moved a lot ... that might make as much as a $100 billion difference in the U.S. trade deficit, which is running at $800 billion. But that would mean countries like Indonesia, Thailand, and Japan all ratcheting up with China in order to get numbers of that order of magnitude. If China alone moves, then it doesn't make that much difference because [the other Asian nations] will ship the goods instead of China.
Doesn't Paulson always emphasize that America has to be patient as China shifts from an export-driven economy to a consumer-driven economy?
Right. But Congress is a little impatient ... . It has said, "We've given you a year to deliver, and we want to see something now."
What sort of protectionist legislation do you expect from Congress?
I think the key thing is some sort of penalty tied to the currency-though there are genuine World Trade Organization questions about the legality of that-and there may be some flexibility on the timing.
How might China react to such legislation?
They have said they would try to take offensive action to try and modulate any legislation. Now once the legislation is in place, they can start thinking about defensive or retaliatory moves. They can litigate cases that may come up with the WTO. What the Chinese can do more immediately is retaliate. They could suspend purchase of Boeing airplanes, for instance, or suspend direct purchase of fertilizer or wheat.
Might they sell some of their massive U.S. bond holdings?
That would really be playing with fire. They could do that-dump a lot of treasury bonds and visibly push interest rates here-that's the nuclear bomb in this business-but that's probably just going to make Congress angry and going to get a further round of escalation.
So how does the U.S.-China trade relationship progress from here?
My view is that it's going to play out over a couple years' time. I think that domestically the Chinese can tolerate between 6 and 10 percent appreciation of the renminbi [yuan] in any one-year period-but if they were to do 6 percent a year for the next three or four years, then you're getting much closer to the equilibrium exchange rate ... . There's going to be a bumpy period-but without a jump-off-the-cliff period.U.S. News & World Report
