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Trade deficit dogs US, China strategic talks

The focus of the two-day meeting on “strategic economic dialogue” is turning out to be China’s yuan currency, which US groups say it is grossly undervalued and responsible for the widening trade gap.

A group of 21 lawmakers from the US Senate’s powerful Finance Committee has written a letter to China’s Vice-Premier Wu Yi, who arrived in Washington Monday with 15 cabinet ministers for the talks, asking her to be prepared to make “meaningful commitments” at the meeting.

Topping their list of immediate concerns is the need to ”increase the flexibility of and appreciate the RMB (yuan).”

“Failure to adequately resolve these short term issues will not only keep our long term objectives out of reach, but also threatens to undermine the relationship between our two countries,” they warned in the letter sent Friday.

Other concerns cited were China’s enforcement of intellectual property rights; implementation of commitments in the World Trade Organization; lingering “unscientific” restrictions on US agriculture products; and tariff and non-tariff barriers on environmental goods and services.

“Progress in many areas has been long promised and is overdue,” said the senators, who oversee US trade policy.

US lawmakers have accused Beijing of keeping its currency artificially low to give its exporters an unfair advantage, a key factor they cited for the snowballing US trade deficit with China that hit 232 billion dollars last year.

They have also threatened to push ahead with legislation imposing sanctions on Beijing if the Chinese refused to budge.

But China’s Wu Yi, known to be a tough negotiator, is unlikely to give in to their demands although she is scheduled to state Beijing’s case for a stable currency as it battles various economic problems.

“Attempts to politicize trade issues should be resisted,” she said ahead of her trip, accusing some US groups of overstating the US trade imbalance with China or even advocating “trade protectionism.”

US Treasury Secretary Henry Paulson said in an interview Tuesday with Beijing’s China Daily newspaper that progress was linked to the US presidential election set for November 2008.

“The reason I want progress so much now is that, with the presidential election coming up, I don’t want people in the United States to use the lack of progress as a reason for saying, “Dialogue doesn’t work, we need tougher legislation or we need to make China an issue in the election,’” he said.

He also told the New York Times: “I want to see specific accomplishments that are clear signposts that we’re headed in the right direction.”

In an apparent bid to placate US concerns ahead of the key Washington talks, Beijing widened the yuan trading band on Monday to display Chinese flexibility.

China, flushed with more than a trillion dollars in foreign reserves, also announced that it would invest three billion dollars in US private-equity firm Blackstone.

Continued investment in American entities could help restore some equilibrium to China’s accounts with the United States and thus alleviate one of the biggest sore points between Washington and Beijing, the Wall Street Journal said.

But the top American business newspaper, known for its conservative slant on its editorial pages, attacked the Bush administration for joining with Congress in demanding a more rapid yuan appreciation.

“The way to blunt Congressional protectionists isn’t to adopt their arguments but to rebut them and point out the risks to our shared prosperity of a US-China currency war,” it said in an editorial on Monday.

US businesses, however, are divided on the issue.

The US-China Business Council described as a “myth” the argument that China’s undervalued currency created a large US trade deficit and prevented American companies from selling more to China.

It acknowledged that China did need to move faster with reforms to allow its exchange rate to better reflect market forces.

But it also pointed out that an international think tank, Oxford Economics, estimated that even a 25 percent revaluation of the yuan against the US dollar would decrease the total deficit by only 20 billion dollars after two years.

The American Manufacturing Trade Action Coalition, which represents more than 200 domestic manufacturing companies, said the deficits chalked up with China had “contributed significantly” to the loss of 3.2 million US manufacturing jobs since 2000.