Event Report: China's Trade Policy and Its Implications for Transatlantic Relations
_This report is based on a lecture by Charles E. Morrison, President of the East-West Center based in Honolulu, Hawaii, held at the German Council on Foreign Relations on June 20th, 2007 in cooperation with the US Embassy in Berlin._Economic relations between the United States and China have received much attention during the last few years, due to the rising trade imbalance between the two nations. Political tensions led to the first WTO dispute case ever to be filed by the US against China, earlier this year. China has run a bilateral trade surplus with the United States since the 1980s, but it was not until the late 1990s that China became the largest single source of the US global trade deficit. In 2006 this deficit exceeded $230 billion and had grown by 300% in five years. This global imbalance is a major source of concern for international trade and financial markets. *Regionalizing Imports, Globalizing Exports* Trying to clarify key factors that account for China’s trade surplus, critics often address China’s low-wage labor and its lack of market access. However, the most persuasive explanation of the growing bilateral deficit is China’s role as the final assembler in an Asian production chain. An increasingly geographically disaggregated production process has made China’s vast unskilled labor pool even more valuable. Goods assembled from imported parts and components now account for about 55 percent of China’s total ex-ports, yet the entire value of these exported goods is counted by US customs as imports from China. China is turning more and more into an Asian "hub". Two trends, regionalization on the import side and globalization on the export side, characterize its economic strategy. *On Balance, US Benefits From Trade Relations* Instead of focusing on the perception of a rising "war trade", a term used by U.S. Treasury Secretary Henry Paulson, one should regard the benefits that arise from an economic relationship with China. From an American point of view, China is not only the third-largest trading partner but also the fourth-largest and fastest-growing export market. US-Chinese economic partnership increases US consumer purchasing power and helps keep inflation and interest rates down. The US economy in general profits from the economic relationship, the huge trade imbalance notwithstanding. *Troubles Ahead on Climate Change, Energy, and Security* China's economic relationship with the US also depends upon how the emerging Asian power will manage the big challenges it now faces. It remains uncertain how China will tackle resource constraints and climate change. Will the leaders be successful in the continued modernization of the Chinese economy? How will income inequities, especially between the urban and rural population, affect social change? How does the Chinese military handle the issue of Taiwan? The answer to these questions will surely affect China’s ability and power as an economic partner and the US will to engage with this partner. *Engaging China Should Be Top Priority* Engaging China and helping China tackle these difficult tasks and promote economic sustainability--a key factor in China’s development, put forward by critics who are afraid China will struggle to achieve them--should be a priority in US-Chinese relations. The legislative approach of some American policy makers to reduce Chinese imports to the US and file dispute cases at the WTO level remains mostly counterproductive, but others are pursuing a strategic economic dialogue. The latter will be successful for a partnership that might not be characterized by common interests but by compatible interests. *Europe: Either With US Or Against US* One must acknowledge that in the American debate about China, the US rarely considers a European point of view. Debate about China is still restricted to two categories: "with us" or "against us". This was obvious in the weapons embargo discussion few years ago. Transatlantic ties towards China are therefore much weaker than they should be. Simply put, the EU and the US do not agree on average and have a rather different approach to engaging China. Paradoxically, while Europe traditionally engaged China in economic terms much more openly than the United States, there are now more and more voices in the academic world that talk about the "Chinese threat" or "China as an aggressor". It will be of great interest to what degree this discussion, which is typical for the domestic American debate, will affect the rather pragmatic EU-Chinese economic relations and, as a consequence, transatlantic relations.
