Trade imbalance is the key economic issue between China and the US. The biggest obstacle that faces the attempt to solve the problem is the wrestling between the insatiable domestic market of the US and the political whims of Congress. To explain this issue, let us first take a look at the causes of this bilateral trade imbalance:

The US current account trade deficit is of America's own making rather than China's.

It is predicted that US trade deficit this year will reach US$800 billion 6 percent of its GDP. But all major trade partners of the US enjoy a favorable balance of trade despite of it.

The EU has the most favorable balance of trade with the US. The combined GDP of EU member countries accounts for 25 percent of the world's total, but their contribution to world economic growth is only 13 percent. China's GDP is less than 10 percent (calculated by purchasing power parity) of the world's total, but the country is responsible for 25 percent of global economic growth.

Japan threw 40 trillion yen (US$360 billion) into the financial market in 2004 to prevent dollar devaluation against the yen, and by doing so widened its favorable trade balance with the US. Half of Japan's 1.5 percent growth rate last year came from exports.

Every big country in the world hopes for a US trade deficit reduction, but they also want to export more to it. So it is unfair for Washington to single out China for running a big trade imbalance. Both China and the US, rather than China alone, benefit from their bilateral trade.

It is a structural problem in US exports. Southeast Asia maintains a favorable balance of trade with China. These countries also have a similar trade position with the US. The two instances of trade imbalance are inter-related. Why? Because half of China's foreign trade is processing-based, where China imports parts from Southeast Asia and assembles them for exports to the US.

If China were to reduce trade surplus with the US, it would have to reduce its trade deficit with countries like Japan, South Korea and regions like Taiwan and Hong Kong. The favorable balance of trade that Southeast Asia has over the Chinese mainland is growing while their trade deficit with the US shrinks.

The trade imbalance between China and the US is a structural problem in international, rather than bilateral, trade. If the US must find the cause of its growing trade deficit, it should first check itself, then the European Union, Japan and Southeast Asia in that order.

It's a problem born of globalization. About 60 to 80 percent of China's export value is generated by foreign-invested enterprises. Much of the country's growing exports come from enterprises owned by cross-national companies, including many based in the US. This is a logical outcome of globalization and of China's policy of reform and opening up to the outside world.

Such exports can be seen as American products made in China and sold at home. If China were to reduce its trade surplus with the US, the profits of those US corporations would surely shrink.

The problem is also a result of US export controls. The US has lost a great deal of competitive edge in China's gradually opening market because of its conservative policies on export control. Labor-intensive products made in the US, such as textiles, simply cannot compete on the Chinese market. These days the most competitive exports to China are from Japan, South Korea and the region of Taiwan. It is the US Congress' refusal to allow high-tech exports to China that has kept the US in a disadvantageous position in bilateral trade with China.

The US is unrivalled in the world of high technology, particularly on military applications. The export ban against China is in fact self-defeating. China can always buy high-tech equipment elsewhere, such as Europe and Japan, unless the US relaxes its export controls.

The US trade deficit with China benefits US consumers as well as the US economy: No trade deficit with China means the US may have to import the same products from other countries at higher prices.

Even some US officials have admitted the dispute over Chinese textiles exports reflects a selective application of protectionism by Washington on certain industries against free market principles.

But this policy will render the "protected" industries even less competitive on the world market, and runs counter to the open economy policy the US has promised.

(China Daily September 6, 2005)