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No Easy Solution to US Trade Imbalance with China

Chinese President Hu Jintao's begins his official visit to the United States on April 18th and is expected to face pressure to increase the value of his country's currency to help reduce America's $200 billion trade deficit with China. But as VOA's Peter Fedynsky reports, a sudden appreciation of the Chinese Yuan could have unintended consequences.

President George W. Bush remarked of the expectant visit:
"The visit of Hu Jintao will be an interesting and important visit. He's coming into a country where there's an over $200-billion trade deficit and a lot of Americans are wondering, where's the equity in trade?"

President George W. Bush attributes much of the U.S. trade imbalance to China's refusal to raise the value of its currency, the Yuan, which many Americans believe gives the Chinese an unfair trade advantage. At the same time, China's foreign exchange reserves include $800-billion U.S.

Jing Huang, a political scientist at the Brookings Institution think tank in Washington, DC, says currency adjustment would diminish the value of those reserves.

“For the Chinese, if they realize that Chinese currency must be appreciated, which means our dollars would be depreciated, then Chinese - [as] any rational people would do - will try to transform their holdings from American dollar assets into euros, Japanese yen or some hard currency. That would set off a chain reaction all over in the global economy and which eventually would hurt everyone," he said.

Huang says that a more expensive Yuan would also reduce Chinese demand for U.S. treasury notes, which could raise mortgage interest rates and hurt America's housing market.

According to Huang, 80 percent of China's gross domestic product is linked to foreign trade compared to only about 20 percent of the U.S. GDP. Because of such heavy Chinese reliance on international sales, Huang says it is not likely that President Hu will satisfy Mr. Bush on the currency issue. To do so, would mean raising the price of Chinese exports, which would reduce demand and trigger a negative political reaction in China.

But the Bush administration must contend with a negative reaction here in the United States.

U.S. Commerce Secretary Carlos Gutierrez recently warned that failure to open the Chinese market is prompting calls for protectionism. "It is important for our colleagues in China to recognize that the voices in the United States calling for protectionist policies are very real, and there is real protectionist and isolationist sentiment creeping up, evolving, emerging in our country," he said.

China is expected to buy as many as 80 U.S.-built passenger jets as part of a current $15-billion shopping spree that includes purchases of U.S. software, agricultural products, auto parts, and telecommunications equipment. Some observers characterize the purchases as "checkbook diplomacy" meant to reduce pressure for trade protectionism.

Jing Huang says the purchases also resemble a public relations effort in U.S. job markets most hurt by the trade imbalance with China.

"They do not want the trade issue to become a political issue, in which China would be further demonized. Because China has something we really don't like as Americans. Number one - it has a single party political system. Number two - its policymaking is not transparent. Number three - its military keeps developing very fast. All of these issues make China not very likable. But their spending here may be to try to prevent that in the mid-term election … [that] China becomes a negative issue,” he said.

With U.S.-China trade relations caught between the rock of a trade imbalance and the hard place of disruptive currency revaluation, University of California economics professor Wing Thye Woo suggests a patient approach.

"What we want is the Chinese to be flexible, to appreciate their currency over time in line with developments in the financial sector, so that there is an orderly winding down of the huge trade deficits that we have," he said.

As in their previous meeting in Beijing, presidents Bush and Hu are also expected to further discuss intellectual property rights; security issues - particularly Iranian and North Korean weapons programs - human rights, freedom of religion and Taiwan.