US China Trade War? Probably Not.

Implications: Despite trade sanctions by the Bush Administration and rhetorical objections by the Chinese government, an all out trade war is highly unlikely.  This article explains why.


Analysis:

US-China Trade War?  Probably Not.

Earlier this month, I had an opportunity to spend time with senior Chinese officials discussing policy matters in quiet settings and without the overlay of our requests pending before the PRC Government.  This allowed me to explore three key questions in the Sino-American trade relationship.  The following comments are based upon those conversations and represent a personal analysis; not specific comments by high-level officials.  Please note that, beyond the sanguine analysis, there is one prospect that could prompt the worst case scenario.  This is discussed in the concluding paragraphs.

 

Trade War – There has been some speculation that U.S. Government (USG) actions to sanction China on specific trade issues will prompt a trade war between the two countries.  Based on conversations at China’s Ministry of Commerce (MOFCOM), I believe such fears are unfounded.  During talks in Beijing, it was clear that working-level MOFCOM officials fully understand the issues involved both in the tariffs placed on paper products and the demand for consultations at the WTO on Intellectual Property Rights (IPR) protection.  They appear ready and willing to work within the rules-based international trade system to resolve outstanding disputes.

 

IPR Protection – There are signs that China is moving toward increased protection for intellectual property rights, particularly as it relates to optical media such as DVDs and CDs.  This analysis is based on articles in both the English and Chinese language press in China discussing the harm done to Chinese artists by the failure to enforce fully Chinese IPR regulations.  These articles tracked an announcement by the public prosecutor that the threshold for IPR violations would be cut in half, making it much easier to jail small scale DVD pirates.  Together, they imply a new crackdown on IPR violations.  Still, the USG is unlikely to be satisfied until China opens the door to more in-theater movies and direct sale DVD’s from the United States.  Both categories are currently restricted by the PRC government.  Within this context, it should be noted that there is visible excitement in China about the scheduled in-theater opening of Spiderman 3, an event that will predate the stateside release by several days.

 

Exchange rate – Last year at an academic session at Harvard University, I struck up a conversation with a Chinese government official who is an expert on international economic issues.  At that time, he told me to expect the renminbi-dollar exchange rate to soften by less than ten percent by spring of this year.  When I arrived in China on April 1, 2007, the rate had dropped to 7.7:1 from 8.2:1 from a trip in the Fall of 2006 – or about seven percent.  Over dinner last week, the same gentleman told me to expect the trend to continue through the end of the year.  If correct, this implies a 7:1 renminbi-to-dollar rate at the start of 2008.

 

Worst Case Scenario – While these developments all suggest improvements in Sino-American relations, one development could upset the trend line.  Many members of the U.S. Congress are demanding changes that exceed the limits of the international system.  For example, several bills would impose tariffs on Chinese imports into the States if the exchange rate is not cut by 27.5 percent from the 8.2:1 ratio.  This is well below the level that my Beijing contact suggests is possible in the near term.  Should a bill pass that obliges the Administration to take steps outside of the WTO system, we should expect China to retaliate in ways that exceed the limits of the system as well.  With disputes then moved outside of the dispute resolution system, a trade war would be inevitable. 

 

Key indicators – Political factors will almost certainly force the U.S. Congress to adopt at least one piece of legislation that proponents can describe as “getting tough with China.”  The exact content of the legislation will be critically important.  Several of the bills pending before Congress include an escape mechanism to avert harsh action toward China.  For example, several bills allow the President to forego the tariffs if he will “certify” that China is not manipulating the value of its currency.  Making such a certification could be politically embarrassing for the President but political embarrassment – particularly for a lame duck President – is preferable to starting a trade war.  In the final analysis, we do not expect Congress to pass China-bashing legislation that forces the President to impose WTO-illegal sanctions on China trade.