The war with china wont'be a trade war;It'll be the real one.

Discussion in 'China' started by ajtr, Oct 20, 2010.

  1. ajtr

    ajtr Veteran Member Veteran Member

    Oct 2, 2009
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    Reluctant Warriors

    Assertive Chinese and job-hungry Americans are gearing up for a trade war across the Pacific. Fortunately, cooler heads will likely prevail.

    The United States and China are deeply interdependent, with trade in goods between the two countries reaching a whopping $366 billion in 2009. But a growing number of influential people on both sides find that reality deeply alarming, albeit for different reasons.

    In the United States, campaign ads this election season routinely blame trade with China for U.S. job losses. And in China, rising stars like Wang Yang, the Communist Party boss who governs China's booming southern province of Guangdong, fret that China's "traditional model is excessively dependent on international demand." In just the latest sign of this growing tension, the U.S. House of Representatives last month passed legislation seeking to raise the cost to China for its currency policies. All signs at the moment point toward increased trade and financial tension between the world's two economic giants.

    A full-fledged trade war between the United States and China would be disastrous; thankfully, it's far from likely. Decision makers on both sides appear to have concluded that their trade disputes can be managed without undermining the entire U.S.-China relationship. Trade conflict is here to stay, but it is fast becoming a "new normal" in relations between Washington and Beijing.

    What is fueling this growing tension on trade issues? Unemployment and flat growth in the United States are one part of the story. But four underlying factors are dramatically changing the U.S.-China economic relationship and will ensure that conflicts persist into the future.

    First, U.S. and Chinese firms increasingly compete head-to-head because China is moving up the value chain far more quickly and across a wider array of sectors -- from electric vehicles to solar energy to high-speed rail -- than many in the United States once expected. As China seeks both to "indigenize" technology -- not simply rely on technology transfers -- and to compete globally, it is forcing U.S. firms to confront a fast-changing and vastly more competitive landscape.

    Chinese firms already offer cutting-edge technology in high-speed rail and are in the hunt for contracts in developed markets such as Australia and California. And U.S. companies that once assumed a grand bargain -- providing U.S. technology in exchange for market access in China -- must now fight Chinese competitors for the same market share.

    Many in China, not least Premier Wen Jiabao, argue that China came late to both the industrial and information revolutions, and they are determined to ride the next technological wave. So, China (like other states before it) is using government policy to support its ambitious goals -- for example, favoring domestic companies in government procurement and offering preferential financing to homegrown national champions such as the Commercial Aircraft Corporation of China, which might soon challenge Boeing in the narrow-body passenger jet market.

    The bottom line is that U.S. firms face a more vigorous challenge from China. And they are working to meet that challenge in two ways: First, by seeking to move up the value chain faster -- companies like Apple, for example, have upped their game and succeeded, even in places like Japan, which is a wonderland of indigenously produced consumer electronics. And second, U.S.-based multinationals are teaming up with Western diplomats to push back against discriminatory market-access policies in an effort to level the playing field in China. Even though China's undervalued currency preoccupies Congress and smaller manufacturers, U.S. firms complain more often about the business climate in China -- a problem that will not go away even if the currency issue disappears.

    A second trend -- partly a result of intensifying competition -- is that old coalitions that once provided ballast to U.S.-China relations are breaking down.

    In China, interest groups divide over nearly every economic issue: Chinese exporters, bankers, and political leaders -- who once coalesced around trade-related issues -- are increasingly at odds. Thus, China's central bank initiated a revaluation of its currency in June despite opposition from China's Ministry of Commerce and export lobbies. Chinese interest groups are split over anti-dumping and protectionist trade measures. And Chinese interest groups are divided, too, about access for foreigners to sensitive sectors, such as Shell's partnership with PetroChina to explore for shale gas in Sichuan province.

    Meanwhile, despite the fact that many U.S. companies are deepening their engagement with China, the old political-business coalition that helped Beijing gain permanent normal trading status in the 1990s is fraying. It would likely be impossible to reassemble the alliance that worked to promote closer trade links in the Clinton and early Bush years. And new areas of trade conflict are emerging, such as in clean energy, which might produce new groups of skeptics. Just last week, the United States opened an investigation into Chinese support for clean-energy producers at the urging of the United Steelworkers, prompting a vigorous verbal challenge from China.

    A third trend is the growing tolerance for trade tensions in both Washington and Beijing. This confidence has made both governments less restrained in pursuing trade disputes. But it also means the United States and China have largely separated security issues, such as North Korea and Iran, from the minutiae of Section 301 and 421 filings and market-access disputes. The relationship will not collapse, even in the face of an avalanche of anti-dumping suits, as both governments work to delink the various issues on an increasingly complex bilateral menu.

    Beijing, having grown more comfortable with the World Trade Organization's dispute-resolution procedures (and having learned to leverage the system to its own advantage), is now prepared to vigorously fight U.S. suits in many of these areas. It has investigated numerous anti-dumping cases brought by Chinese producers, lent its ear to a proliferation of Chinese business lobbies, and is investigating a countervailing duties case into U.S. subsidies for the Big Three automakers.

    Finally, U.S. demands for access to China's 1.3 billion consumers are growing in both scope and intensity, particularly as China's indigenous innovation policies threaten the proprietary technologies of U.S. companies. And demands for market access now flow both ways. A China already resistant to U.S. pressure will become even more so the more Chinese investments in the United States are blocked.

    Taken together, these four factors guarantee that U.S.-China trade relations are certain to become more fraught in the months and years ahead.

    But U.S.-China relations can probably weather a proliferation of such acrimonious trade disputes, especially if they are channeled through the WTO and other rules-based mechanisms. The bilateral relationship is extremely diverse; both sides have strong incentives not to let trade friction undermine every other form of cooperation. And it's worth noting that virtually no U.S. company plans to flee China -- not even those that stand to lose the most from China's indigenous innovation policies.
    Meanwhile, Beijing has two good reasons to keep the overall relationship with Washington on track. For one, China's economy is not yet "decoupled" from America's; China continues to run large trade surpluses with the United States and, because of its own stabilized exchange rate, is bound to U.S. monetary policy as its dollar reserves accumulate. For another, Beijing has more trade and investment options with more countries than ever before; China can now weather conflict with the United States more easily -- thus Beijing need not treat trade conflict with Washington as a strategic threat.

    Still, to keep frictions from escalating, both sides must make sure they stick as much as possible to WTO and rules-based mechanisms for resolving their differences, avoiding purely punitive actions not linked to specific commercial grievances.

    The likely course for the United States probably involves pursuing a mix of anti-dumping and countervailing duties cases -- and continuing to search for a more systemic remedy to press, persuade, and sometimes coerce China to level its playing field.

    That will produce very real tensions. But rules-based spats, though contentious, will not likely result in underlying strategic conflict. Indeed, the essential strategic reality of Asia today is this: China is fast becoming the central player in a new economic regionalism, but Asian countries are deepening defense and political coordination with the United States as a hedge against Beijing's growing strategic weight.

    For that reason, military and political disputes (think standoffs in the South China Sea, or over Taiwan) are more likely to decisively destabilize U.S.-China relations. The business of both China and the United States is business. And both plan to keep doing a lot more of it with one another.
  3. ajtr

    ajtr Veteran Member Veteran Member

    Oct 2, 2009
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    China Said to Widen Its Embargo of Minerals

    HONG KONG — China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted some shipments of those materials to the United States and Europe, three industry officials said this week.The Chinese action, involving rare earth minerals that are crucial to manufacturing many advanced products, seems certain to further intensify already rising trade and currency tensions with the West. Until recently, China typically sought quick and quiet accommodations on trade issues. But the interruption in rare earth supplies is the latest sign from Beijing that Chinese leaders are willing to use their growing economic muscle.

    “The embargo is expanding” beyond Japan, said one of the three rare earth industry officials, all of whom insisted on anonymity for fear of business retaliation by Chinese authorities.

    They said Chinese customs officials imposed the broader restrictions on Monday morning, hours after a top Chinese official summoned international news media Sunday night to denounce United States trade actions.

    China mines 95 percent of the world’s rare earth elements, which have broad commercial and military applications, and are vital to the manufacture of products as diverse as cellphones, large wind turbines and guided missiles. Any curtailment of Chinese supplies of rare earths is likely to be greeted with alarm in Western capitals, particularly because Western companies are believed to keep much smaller stockpiles of rare earths than Japanese companies.

    China experts said on Tuesday that Beijing’s assertive stance on rare earths might also signal the ascendance of economic nationalists, noting that the Central Committee of the Communist Party convened over the weekend.

    A few rare earth shipments to the West have been delayed by customs officials in recent weeks, said industry officials in China, Japan and the United States. But new restrictions on exports appear to have been imposed on Monday morning.

    Industry executives said there had been no signal from Beijing of how long rare earth shipments intended for the West would be held by Chinese customs officials. A few shipments are still being allowed out of the country for reasons that remain unclear: a fourth rare earth industry official said on Wednesday that one of the 32 authorized rare earth exporters in China had been allowed to export one container of rare earths to the West on Tuesday and hoped to be allowed to ship another on Thursday.

    China’s official stance remained unclear on Wednesday. In an apparent reference to a report on Tuesday in the official China Daily newspaper, the commerce ministry said the report, predicting a decline of up to 30 percent in rare earth export quotas next year, was “totally groundless and purely false,” and added that no decision had been made yet on future quotas.

    Without mentioning whether customs officials were interfering with statements to the West this week, the statement also said that, “China will continue to export rare earth to the world, and at the same time, in order to conserve exhaustible resources and maintain sustainable development, China will also continue imposing relevant restrictions on the mining, manufacture and export of rare earths.”

    Japan’s Kyodo news agency reported on Wednesday that an unidentified diplomatic source in Beijing had said that rare earth shipments to the United States and Europe were being held up by customs officials for tighter inspections, one of the explanations that customs officials have also given in blocking shipments to Japan for the past month. But John Clancy, the trade spokesman for the European Commission, said in a statement on Wednesday that, “at this time, we cannot confirm claims made by European industry officials in media reports of China blocking rare-earth shipments to the” European Union.

    The signals of a tougher Chinese trade stance come after American trade officials announced on Friday that they would investigate whether China was violating World Trade Organization rules by subsidizing its clean energy exports and limiting clean energy imports. The inquiry includes whether China’s steady reductions in rare earth export quotas since 2005, along with steep export taxes on rare earths, are illegal attempts to force multinational companies to produce more of their high-technology goods in China.

    Despite a widely confirmed suspension of rare earth shipments from China to Japan, now nearly a month old, Beijing has continued to deny that any embargo exists.

    Industry executives and analysts have interpreted that official denial as a way to wield an undeclared trade weapon without creating a policy trail that could make it easier for other countries to bring a case against China at the World Trade Organization.

    So far, China seems to be taking a similar approach in expanding the embargo to the West.Wang Baodong, a spokesman for the Chinese Embassy in Washington, said on Tuesday that the Chinese government was putting new restrictions on the mining, processing and export of rare earths to protect the environment. But he said that China was not violating any W.T.O. rules in doing so and that it was not imposing an embargo or trying to use rare earths as a bargaining chip.“With stricter export mechanism gradually in place, outbound shipments to other countries might understandably begin to feel the effect,” Mr. Wang said in an e-mail. “But I don’t see any link between China’s reasonable rare earth export control policy and the irrational U.S. decision of protectionist nature to investigate China’s clean energy industries.”

    Nefeterius Akeli McPherson, a spokeswoman for the Office of the United States Trade Representative in Washington, said that American trade officials were looking into the matter, after a report of the Chinese customs restrictions was published on Tuesday afternoon on the Web site of The New York Times.

    “We’ve seen the news report and are seeking more information in keeping with our recent announcement of an investigation into whether China’s actions and policies are consistent with W.T.O. rules.”

    Jeremie Waterman, the China director of the United States Chamber of Commerce, said that he was still checking government and industry sources to learn the extent of a suspension of Chinese rare earth shipments. “If it’s true, it’s disturbing news to say the least,” he said.

    Mr. Waterman said that rare earths were so important to advanced manufacturing that restrictions on their trade might need to be put on the agenda of the Group of 20 meeting of heads of state, scheduled next month in Seoul, South Korea.

    The Chinese government office that oversees rare earth policy, which operated with considerable independence for many years, was moved early last year into the Ministry of Industry and Information Technology. That ministry, formed only two years ago to draft plans for global leadership in many industries, has emerged as a bastion of economic nationalism.

    Despite their name, most rare earths are not particularly rare. But most of the industry has moved to mainland China over the last two decades because of lower costs and steeply rising demand there as clean energy industries have expanded rapidly.

    Congress is considering legislation to provide loan guarantees for the re-establishment of rare earth mining and manufacturing in the United States. But new mines are likely to take three to five years to reach full production, according to industry executives, although existing uranium mines may be able to move faster by reprocessing previously mined material, which often contains rare earths.

    China reduced in July its export quota for rare earths for the second half of the year by 72 percent. Exporters had only six weeks’ of quotas left when China imposed its unannounced embargo on shipments to Japan.

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