April 18th witnessed two important developments in U.S.-China trade relations.  The day started with the arrival of China’s President Hu Jintao in Washington state for his first official visit to the United States.  Hu’s visit was intended to deepen U.S.-China economic relations amidst rising protectionism in Congress, and assert China’s rising global influence. 

In Washington, D.C., April 18th also saw a changing of the Bush Administration guard on trade policy, and possibly of the Administration’s approach to China policy.  President Bush announced that he was nominating current U.S. Trade Representative (“USTR”) Rob Portman to head the Office of Management and Budget, and current Deputy USTR Susan Schwab to replace Portman.  Portman’s departure, though not surprising given the current White House shakeup, comes at a critical time as the Doha Development Agenda (DDA) negotiations hang in the balance.  Many trade hands in Washington are saying that shifting Portman, a highly-regarded “rising star” in the Administration, from a trade portfolio to the OMB position sends a strong signal that the Bush Administration no longer places trade high on its policy agenda, and in particular that there is little hope for a substantively successful outcome in the DDA negotiations.

With regard to China, the emerging view seems to be that Portman’s transfer may reopen the door for Deputy Secretary of State Robert Zoellick to play a more critical role in overall China policy coordination.  That, analysts say, would mean that the Bush Administration’s China trade agenda will shift away from the goal of using the DDA talks to further integrate China into the world trading system, and deepening bilateral trade relations with China to that of responding to domestic pressures by increasing enforcement against China’s alleged unfair trade practices. 

The notion that the U.S. line on China trade was hardening may have been further confirmed by Ambassador Schwab’s comments thanking Bush for the USTR nomination.  She made no specific mention of China but noted that “holding our trading partners accountable through enforcement of existing trade laws and agreements will continue to be a critical component of our trade agenda.” 

So, in a single day, on one U.S. coast, the President of China was seeing closer ties to the United States, promising more responsiveness on trade issues, and describing the extensive economic relationship between the two countries.  On the other coast, many feel the President of the United States was signaling a shift in U.S. attitudes that could put additional tension on that relationship.  What are trade watchers to make of these parallel events?

Clearly despite years of effort by U.S. Administrations from both political parties, the United States still is unable to define either the goals or the direction of the U.S.-China trade relationship.  This is also true on the strategic level, but in the context of trade, the “disconnect” seems to be even more pronounced.  The United States and China are speaking to one another about trade on a continuous basis, but it is difficult to conclude that one is hearing or understanding what the other is saying.  An analysis of the events leading up to President Hu’s meeting with President Bush make clear that both governments are approaching bilateral relations with very different objectives in mind:   China recognizes the need for reform, but on a limited basis and at its own pace.  The Bush Administration, faced with little progress to date and substantial pressure from U.S. business and a bipartisan Congress to “do something about China,” wants dramatic reform, on a defined timetable, “or else,” with the “or else” as yet undefined in any real manner.  Whether each side can find a path that accommodates the needs of the other is critical to the future state of bilateral trade relations, and could result in improvement or a real and very adverse deterioration in the overall U.S.-China relationship.

U.S. Demands

The U.S. and Chinese governments have viewed President Hu’s trip to the United States in different ways for different purposes.  For China, Hu’s trip represented a unique public relations opportunity to both deepen bilateral trade relations and underscore China’s rising influence on the world stage.  Accordingly, the Chinese government regarded the trip as an official state visit, expecting all the usual fanfare, including a formal state dinner. 

The Administration, on the other hand, saw Hu’s trip as a privilege Bush was extending to a leader seeking respect on the world stage, a platform from which to assert the role of Bush as leader of the only global superpower, and an opportunity for Bush personally to increase pressure on China to live up to its trade obligations.  As if to underscore this perspective, U.S. officials rebuffed China’s request for a formal state visit, arranging only for a short meeting between the leaders and a formal luncheon.   Desiring a successful visit, the Chinese government acquiesced to U.S. wishes on the formalities of the visit.

The U.S. trade agenda for the talks consisted of one primary goal: “recalibrating” the bilateral trade relationship.  Assistant USTR for China Tim Stratford best described this notion at a recent hearing, in which he said “while our bilateral trade relationship has been largely beneficial for both the United States and China, it is not sufficiently balanced in the opportunities it provides.”  He explained, “there is concern that the U.S.-China trade relationship lacks balance in opportunity, as well as equity and durability.”

To seek more balance in the relationship, Bush Administration officials sought assurances from China that significant efforts would be made to address the top three U.S. trade concerns at the U.S.-China Joint Commission on Commerce and Trade (“JCCT”) meetings on April 11th: the worsening aggregate U.S. trade deficit, China’s undervalued currency, and China’s weak record of intellectual property rights (“IPR”) protection.  In early March, Commerce Secretary Gutierrez went so far as to threaten cancellation of the JCCT meetings unless the Chinese government was willing to address these concerns, specifically IPR protection for DVDs and software. 

Members of Congress from both parties joined the Administration in pressuring China to address key concerns, specifically the need for China to revalue the yuan.  Senators Lindsey Graham (R-SC) and Charles Schumer (D-NY), sponsors of S.295 to apply a 27.5 percent across-the-board tariff on Chinese imports unless the yuan was revalued, visited China in March to impress upon Chinese leaders the political and economic importance of revaluation.  In a surprise turn of events, the Senators came away from the trip with what Senator Schumer described as “a real feeling that the Chinese realized that pegging their currency is not only bad for America, but bad for China as well.”  Consequently, both Senators decided to delay consideration of S.295 to not later than September 29th, but with one caveat--they would seek earlier consideration of the legislation if there are no indications that China is moving ahead with currency reform before that date. 

Another reason that Senators Graham and Schumer delayed consideration of their legislation was the introduction of S. 2467 by Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Democrat Max Baucus (D-MT).  The Grassley-Baucus bill, which was introduced on the same day Senators Schumer and Graham decided to delay consideration of S.295, represents a departure from the constant threats of action and negative rhetoric from lawmakers about China’s undervalued currency, which have yielded so few results. 

S.2467 reflects serious concern on the part of both Senators Grassley and Baucus about the direction of U.S.-China trade relations, and offers solutions to key problems that could yield significant support from Senators.  For example, S.2467 contains language to repeal the 1988 Exchange Rates and International Economic Policy Coordination Act and provides a new mechanism to address misaligned currencies that adversely affect the U.S. economy.  Specifically, the bill requires that the United States enter into negotiations with any country deemed to have a misaligned currency, and, if necessary, impose some form of economic sanction if such negotiations fail to produce a positive result.

China’s Response

The Chinese government responded to U.S. demands by making commitments to move forward on four major issues at the JCCT meetings.  In doing so, the Chinese government hoped to mitigate harsh rhetoric from Congress and pave the way for a successful visit by President Hu.  First, Chinese officials agreed to increase market access for U.S. exporters by beginning the administrative process that could lead to rescinding the beef ban, adjusting equity capitalization requirements in the telecommunications sector, and removing barriers to trade in medical devices.  Second, the Chinese government agreed to improve transparency by joining the WTO Government Procurement Agreement and requiring all levels of government to publish trade measures in one journal.  Third, the government agreed to address key U.S. IPR concerns by requiring the pre-loading of legal operating system software on all computers produced or imported into China, ensuring the use of legal software in government and enterprises, pursuing IPR cases raised by the U.S. government, and initiating a new action plan to improve IPR enforcement.  Finally, in an effort to redress the bilateral trade imbalance, a business delegation accompanying Chinese officials to the JCCT meetings signed purchase contracts with U.S. companies such as Boeing and Microsoft worth $16.2 billion.  No commitments were made regarding foreign exchange.

Many U.S. opinion leaders and decision makers expressed the view that the JCCT commitments were not as definitive or extensive as the United States would have liked.  Senate Finance Committee Chairman Charles Grassley (R-IA) reflected this view in the remark that, “It looks like there were some positive developments at this year’s meeting.  But lofty statements coming from a meeting don’t mean a thing if there isn’t follow-through.  So the question now is, how long will it actually take to achieve the good objectives, including reopening the Chinese market to U.S. beef?  I’ll be keeping a very close eye on what happens in the weeks and months ahead.”

Outlook

With the mid-term Congressional elections fast approaching, President Bush is still virtually forced to demonstrate visibly to the American public that he will not be satisfied with half-measures on the currency, IPR, and overall trade imbalance issues.  Therefore, the Treasury Department can be expected to move a step closer, if not all the way, to citing China as a currency manipulator in its forthcoming report due at the end of April.  The Bush Administration will also give more consideration to bringing a WTO case against China for failing to show evidence of efforts by the Chinese government to enforce IPR laws, specifically as they relate to criminal activities.   These efforts may well stave off potential action by the current Congress on pending China-related legislation.  But they will not be enough, especially if the Democratic Party is able to take control of either the House or Senate when the new Congress convenes in January 2007.

In their joint remarks following their April 20th meeting Presidents Bush and Hu were cordial, and showed little obvious disagreement or tension on trade, with Hu acknowledging the legitimacy of U.S. complaints about the yuan and IPR enforcement, and Bush agreeing that these problems needed to be addressed.  This was to be expected--given the investment both leaders had in having their first summit be seen as successful.  Although President Hu Jintao agreed to continue working to address U.S. concerns, it is unlikely that in the absence of additional concrete actions, this kind of general statement is enough to placate the factions in the U.S. who are hyper-critical of China. The lack of positive, definitive forward movement in the relationship means that the future direction of U.S.-China trade relations remains undefined and therefore at risk of serious confrontation unless such movement takes place in the not too distant future.  In short, the United States and China need to end the “disconnect” and start some substantive and productive communicating as soon as possible.

© 2006 Russell Smith & Caroline Cooper, Willkie Farr & Gallagher LLP
for KWR International, Inc.
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