Fiction behind the friction

Even though trade protectionism does no one any good, China and the United States will experience more trade friction in the months ahead.

China's comparative advantages in manufacturing are the main cause of its trade surplus with the US. The surplus is created through the labor-intensive processing of raw materials, components and parts imported from foreign countries and then selling finished goods to Western countries.

Although the cost of labor in China has been growing in recent years, it is still relatively low, especially when compared with the high cost of labor in the US. China is still a country with abundant human resources, resulting in China's incomparable advantage in low-end manufacturing. In other words, as long as the rule of free trade is followed, China will have a surplus in its trade with the US.

The problem is the US government does not view it this way and in order to realize the Barack Obama administration's goal of doubling exports in five years it has applied four protectionist measures in 2011.

First, since 2011, the US has threatened to label China as a currency manipulator, claiming that the renminbi exchange rate should appreciate by 20 percent in the short term, to reach the goal of a 40 percent appreciation since the exchange rate reform began in 2005.

Second, the US authorities have brought anti-dumping and anti-subsidy cases against China, including automobile tires in 2009 and the photovoltaic industry late in 2011. In February, the US set up the Interagency Trade Enforcement Center, to coordinate such actions against China.

Third, the US has been pushing the establishment of the Trans-Pacific Partnership, an ambitious free trade agreement with eight Pacific-Rim countries and possibly Japan. China, despite being the largest trading nation in the Pacific Rim, was given the cold shoulder.

Fourth, at the end of last year, the Obama administration launched a series of preferential policies aimed at attracting outsourcing back to the US.

What effect have the four measures had?

It is useless to label China an "exchange rate manipulator" because since 2005, the renminbi has appreciated more than 25 percent. The goal of 40 percent appreciation was raised by an international research report and is not a set target. Whether such goal is reasonable or not, requires further analysis and discussion.

The Trans-Pacific Partnership, will not benefit the US, because although China-US trade will decline, the US will only be transferring its imports to other countries. Besides the US, and Japan if it joins, the first members will be mainly small countries, like Singapore, Malaysia, Brunei and Vietnam in Asia, Australia and New Zealand in Oceania, and Chile and Peru in South America, and their products will be an attractive alternative to made-in-China products as they will have cost advantages over US and will be tax free.

Finally, the Obama administration's plan to "revive American manufacturing" is simply wishful thinking, as the US does not enjoy any advantage in producing labor-intensive products. The US' real advantages are in the research and development and designation fields.

Such a plan may stimulate US industry in the short term, but the effects will not last long and the US government may pay a price for its actions in the long run.

Theoretically, the easiest way to reduce the US' trade deficit with China is appreciation of the yuan, however, if appreciation cannot be realized, the US will create more trade frictions to reduce made-in-China imports.

Domestic corporations should be well prepared for this. Instead of being afraid of trade frictions, they should actively deal with them by lobbying through industrial associations and submitting materials to the Disputes Committee of the World Trade Organization for adjudication.

The Chinese government should also establish a trade body specializing in dealing with such disputes and investigations, similar to the new Interagency Trade Enforcement Center in the US.

The author is an associate professor at China Center for Economic Research, Peking University.

(China Daily 04/19/2012 page9)