economics

March 22, 2010

China’s commerce minister: U.S. has the most to lose in a trade war

Chen Deming also said the U.S. government’s “obsession” with China’s exchange rate could not be seriously addressed until it stopped blocking the export of high-tech products, such as supercomputers and satellites, to China. “If some congressmen insist on labeling China as a currency manipulator and slap punitive tariffs on Chinese products, then the [Chinese] government will find it impossible not to react,” Chen said in an interview with The Washington Post. “If the United States uses the exchange rate to start a new trade war, China will be hurt. But the American people and U.S. companies will be hurt even more.”

Chen’s comments, made during an interview Sunday, reflect the exasperation within the Chinese leadership regarding the United States’ attempt to push China to allow its currency, the yuan, to rise against the dollar. In addition, Chen’s remarks also underscore how China is seeking to use the current trade dispute with the United States to push its own agenda in Washington — to eliminate, or at least ease, the 20-year-old sanctions that limit American exports to China.

President Obama has contended that if China lets the yuan appreciate, U.S. exports would increase. Sen. Charles E. Schumer (D-N.Y.) is authoring legislation that would place tariffs on Chinese goods if China does not allow its currency to float more freely. On April 15, the Treasury Department is scheduled to release a report on worldwide currencies. Chen said the Chinese government does not want to be labeled a “currency manipulator.”

Chen, who has studied at Harvard University, said he didn’t understand what the United States was attempting to achieve by threatening China with tariffs.

“You’re not going to get 1.3 billion Chinese to change by insulting them,” he said. “Could it be related to upcoming elections? I don’t know. Because economically, it makes no sense.”

Chen said if the U.S. actions were geared toward decreasing America’s trade imbalance by limiting imports, it wouldn’t work. Perhaps imports from China would decrease, but that wouldn’t mean that Americans would start producing goods such as telephones and televisions again. “That production isn’t going to return to America, that’s just not practical,” he said. “Globalization has changed all that.”

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// ]]>Chen said the best way for the United States to increase its exports to China would be to relax restrictions on the export of high-technology and dual-use goods to China. Since 1989, when the Chinese government launched a crackdown on student-led protests around Tiananmen Square, the United States has placed limitations on some exports. Chen said those limits have amounted to billions of dollars a year in trade.

And he added that under such restrictions, talk about a more liberalized exchange system in China is a non-starter. “If you want to discuss the exchange rate, you have to do it under a free trading system,” he said, “a system wherein if I want to buy something I can, and if you want to sell it you can.”

Chen cited some instances of U.S. restrictions. After the massive earthquake in Sichuan province in 2008, for example, China sought to buy engines for Black Hawk helicopters that the United States sold China in the 1980s when the countries were aligned against the Soviet Union. Chen said China was trying to make the purchase so it could use the helicopters to save people injured in the quake, but that the United States rejected the request. (U.S. officials have raised doubts about China’s claim, pointing out that Black Hawks have a limited carrying capacity.)

China solved its problem by borrowing helicopter engines, and subsequently buying helicopters, from Russia, Chen said. The same holds true for satellites, he added. China would rather buy them from the United States, but concerns about export controls have forced it to source satellites from Europe, Chen said. “This is the reason why our trade balance with the United States is skewed,” Chen said. “The United States has strict export controls to China.”

And don’t expect that China will simply do without these goods, he added. “We’re a nation of 1.3 billion people. We graduate 7 million university students a year. We’ll either make it ourselves or buy it from somewhere else,” he said.

Obama came into office saying he was going to review the limits on exports to certain countries. “But,” Chen pointed out, “that was more than half a year ago and, so far, nothing has happened. He’s said he wants exports to double in five years, but I don’t know whom he is going to sell them to.”

Chen said that China does not want the trade issue politicized. To that end, he said a deputy trade minister, Zhong Shan, would arrive in the United States in the next few days to discuss trade issues with his counterparts at the Commerce Department and the Office of the U.S. Trade Representative. “Both sides need to stay cool,” he said. “We need to sit down and talk.”

But if the United States does decide to impose tariffs on China, Chen said, American companies operating in China, which account for more than 60 percent of China’s exports to the United States, would surely be hurt the most.

“In the end,” Chen said, “America is the one that needs to adjust.”

While some analysts have predicted that China would soon start to let the yuan appreciate, Chen’s interview illustrated the fact that there is a strong lobby in China opposing revaluation. One reason why a revaluation would be dangerous for China, Chen said, is that profit margins for Chinese exporters are tiny — ranging from 1.7 to two percentage points.



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