Wednesday, May 23, 2007

America Didn't Get What She Wanted; Now What?

I am no economist, nor politician, neither a VIP of some giant international corporation, but I am a little worry now. What is America going to do to China now that the second round of high level trade talks between the U.S. and China came to a close without accomplishing much of what the Americans wanted?

An Associated Press report pretty much sums up the "disappointing" results of this round of trade talks. With Secretary Henry Paulson hosting a delegation of high level Chinese officials, the two sides touched up a wide array of trade issues between the parties. They, as I think, agreed to continue to disagree on some of the thorniest issues:

  1. the undervaluation of the Chinese currency--"Renminbi" (or "Yuan");
  2. the failure of Chinese government in its protection of intellectual properties;
  3. American companies' access to the Chinese market, especially in the financial services sector.

Aside from the disagreements that remain, the parties did agree on the following, which might make some happy in the U.S.:

  1. the number of daily passenger flights between the U.S. and China will be doubled in 2012 from the current 10 to 23 in five years;
  2. an increase of the number of cargo flights will also increase;
  3. a slight expansion of financial services to enter into China.

Given the strong sentiments involved and forceful arguments advanced by both sides on these tough unresolved issues, I am uneasy about what might happen in the next 18 months. Once again, I am no politician or economist, but I do want to voice what I sense might happen.

First, the United States will continue to push for a quickened pace for the appreciation of the Chinese Renminbi for a couple of obvious reasons. The trade deficit with China is simply too large to overlook; it was a whopping $232.5 billion in 2006 according to the above cited AP report, which is reportedly larger than U.S. trade deficit with any country in history. In addition, an attack on China makes good political fodder in an election year.

Second, China, on the other hand, is unlikely to back down on its position to let the Renminbi rise on the scale and in the pace that the United States wants. That is an enormous 40% (this is the figure most frequently quoted and used in the context of the Chinese currency undervaluation.) in a short period of time. Even though what constitutes a "short period of time" is not specifically defined or made public by U.S. lawmakers, it seems that patience is running very thin for many who have subscribed to Paulson's saged notion of patience in dealing with the Chinese. Probably many complicated political, economical, and social factors in China contribute to the Chinese government's unwillingness to appease the United States in the currency issue. Very simply, the idea or the perception by others that China is appeasing the United States or is giving in to intense U.S. pressure does not go very well in an increasingly nationalistic society. It might also be worthy noting that export is still and probably will remain a key factor in creating jobs and generating revenue for China, and a sudden rise in the value of the Chinese currency as desired by the United States will have unimaginable impact on the economic health of the country as a whole. Without sounding any more stupid in my layman's analysis of the Chinese government's hesitance to agree with the U.S. on the currency issue, I think it is not too difficult to have a general idea that China will not at any time soon budge on this one.

OK, here is the simple way to put what I labored so hard to get across in the last two LONG paragraphs--the U.S. really wants China to do something because it thinks that the desired action by China would solve a host of other related issues, but China does not want to do it because it either does not want to bend its knees or it simply cannot do it right now in the way the U.S. wants it, or both.

Absent some middle ground between the current positions held by China and some lawmakers in the U.S., I'm afraid that some serious trade war may arise in the foreseeable future in light of the political landscape and environment. Surely, I hope that I' wrong. But if my fear bears some legitimate and logical reasons, I hope politicians in both countries will look at the bigger picture of building a truly symbiotic relationship benefiting both sides without resorting to another "war."

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