China and the United States have entered a period of inextricable interdependence in economic and trade relations. A robust US economy will serve the best interests of China while further Chinese economic growth will continue to make China the fastest growing export market of the US.
However, for the past few years this mutually beneficial relationship has been overshadowed by the dispute over the persistent trade imbalance. A number of protectionist trade bills against China have been brewing in the US Congress.
Emotional political arguments have been used to justify such legislation. Critics like to slander China for flooding the United States with what they term "cheap and job-destroying imports" in complete disregard of the enormous benefits for the general American public and trade interests of American business.
There is a danger that this blame game could evolve into the fatal mistake of adopting protectionist legislation that will cause irreparable damage to bilateral economic and trade relations as well as the multilateral trading system.
It is in no one's interests to suffocate the engine of world economic growth with protectionist measures. It is gratifying that at this juncture the Chinese government and the US administration have launched a regular strategic economic dialogue. The purpose of the China-US Strategic Economic Dialogue, with the second round just completed in Washington, is to carry out objective review of the existing problems and find long-term solutions from a global perspective.
China recognizes that its persistent and increasing trade surplus could cause structural adjustment burdens to its trading partners. However, in a globalized economy, all economies have to restructure. China's export capability is attributable to the openness of the Chinese market, particularly the very liberal foreign direct investment regime.
Foreign investment ventures account for more than 60 percent of China's total exports. Curtailing China's export capability would mean the counter-productive move of penalizing export sectors including foreign investment enterprises.
China is making strenuous efforts to redress the imbalance through a mixed package of measures.
A major aspect is further market-oriented reform of its macroeconomic policies coupled with administrative measures to boost domestic demand and slow exports. But the impact of systemic reform will be felt only in the course of time.
The United States should also examine the trade imbalance in an objective manner. It needs to make the necessary structural adjustments to enhance competitiveness and eliminate export restrictions on technology goods where it has the comparative advantage.
US officials keep arguing that technology represents only a very small proportion of Chinese imports from the United States. The cause is stringent US export control.
The US-China trade imbalance should be examined in the framework of overall US-China economic relations as well as in the global context.
American business is in the best position to tell where American interests lie. The US-China Business Council is cautioning US trade policymakers to avoid focusing on the bilateral trade deficit while missing the bigger story of the US trade imbalance.
According to the council's recent study, China's share of the US global trade deficit over the past decade has only grown slightly - from 27 percent to 28 percent.
During the same period, the rest of East Asia's contribution to US global trade deficits declined sharply from 43 percent to 17 percent because East Asian economies invested heavily in China. As a result, they shifted their long-standing trade surplus with the United States to China.
Meanwhile US trade deficits with the rest of the world have grown dramatically. A unilateral US sanction against China will wreak havoc on the East Asian economies.
Factual data speaks louder than political rhetoric. The US-China Business Council in its latest report presented convincing statistics documenting the benefits accrued to the United States. US exports to China since 2000 have grown at a significantly faster rate than US exports to any other major export market.
Between 2000 and 2006, overall US exports to China increased 240 percent. Growth in exports to China far outstripped exports to the rest of the world in almost every US state. Smaller states have shown remarkable growth of exports to China. For example exports to China from Vermont increased by 1,300 percent, Delaware by 844 percent, South Carolina by 453 percent.
Paradoxically, South Carolina is one of the toughest hard-line states pushing for protectionist legislation against China. The Wall Street Journal May 1 editorial made the point that the US Congress shouldn't "spark a trade war that would kill the Peking duck laying golden eggs".
It goes without saying that a long-term solution to the imbalance will require structural reform from both sides. Chinese policymakers are advised to take a global view in designing industrial policy.
That would mean give and take in market access, creating an open market, letting market forces decide what to produce, what to import and what to export. It would be unrealistic, unwise and inefficient for every industrial sector to attempt a trade surplus, an argument frequently used by domestic industries to resist further liberalization.
If this were accepted as a principle, the Chinese Ministry of Commerce would face an impossible task in international trade negotiations.
For example, given the limited arable land and shortage of water resources, attempting an agricultural trade surplus would drive farmers to over-exploit the land and accelerate the depletion of precious water resources, precipitating environmental degradation.
This is contrary to the "scientific view of development" advocated by the central government as a core principle of development policy.
China has made quite extensive market access commitments in the service sector compared with other more advanced developing countries. But in some sub-sectors implementation of these commitments has lagged behind.
The faithful implementation of the commitments could considerably improve market access conditions for US service providers who have comparative advantages in their respective fields.
As a matter of fact, this also complies with China's own priority of accelerating the development of the service sector. Faithful implementation would mean liberalization both in spirit and in deed.
For example, China allows foreign holdings in basic telecom services of up to 49 percent. Until now nothing has happened. The authorities may need to review whether regulatory measures have been too stringent, forming barriers to entry. There is a need to improve regulatory practices.
Hopefully, with future rounds of the China-US Strategic Economic Dialogue, both sides will join efforts to support open trade, reaffirm adherence to WTO rules and disciplines, and make clear the need to combat protectionism.
The author is former Chinese senior trade negotiator
(China Daily May 24, 2007)