By Dr. Paul Freedenberg,
For Manufacturing Technology
The U.S. racked up a trade deficit of $162 billion with China last year, so it's understandable that the Commerce Department would create numerous programs to shrink it. In addition, China is growing at an annual rate of 8% to 9% and seems to have an insatiable appetite for many of our industrial goods.
The flow of trade missions headed to China to promote U.S. goods is practically constant these days. That's because unlike Japan, China is comparatively open to investment, and unlike the former Soviet Union, China is open to two-way technology transfer. It has also sent tens of thousands of its students to study in U.S. universities.
Thus, many Chinese businessmen are already trained in the American way of conducting business, are familiar with U.S. machinery, and are generally knowledgeable of American products. All this, in turn, gives us a head start in our competition for the China market.
Why then is our bilateral trade deficit with China expected to climb as high as $200 billion this year? And why has it been growing at an unsustainable 20%/year for the past 5 years? It is difficult to explain China's bilateral trade surplus with the U.S. because historically China has run a trade deficit with the rest of the world.
In earlier columns it has been noted that the yuan was fixed to the dollar at a value which may have provided as much as a 40% subsidy for Chinese goods in our market.
Last month, in response to pressure by both the U.S. Congress and the Treasury Department, the Chinese Government announced a 2% upwards revaluation and an intention to allow the yuan to float in a tightly managed fashion against a basket of currencies.
This may be the first tentative step toward eliminating the currency subsidy. Nevertheless, China's new foreignexchange policy will have little appreciable impact on the bilateral deficit in the short run.
Perhaps part of the explanation lies in the ambivalent way in which the U.S. Government approaches sales to China. A case in point is the Commerce Department. While Commerce officials lead trade missions to China, the Department's Bureau of Industry and Security (BIS), which sets policy on export controls, has announced its intention to promulgate new regulations aimed at ending sales of U.S. dual-use technology to the Chinese military. As simple as that sounds in theory, the practical application of such new regulations is likely to significantly deter Chinese companies from doing business with the U. S.
The Chinese military produces its equipment at factories across China and purchases equipment from every aircraft factory in the country, save one. Will all these factories be placed off limits to American capital-equipment manufacturers and what standard will be used to distinguish acceptable end users from unacceptable ones? To address these questions, BIS announced the new regulations will be called the "Chinese Military Catch-All." Such a title does not imply a narrow focus, or a sense of limitations, and Chinese managers will most likely see this as another reason to believe that U.S. suppliers of industrial equipment may be unreliable and could suddenly and unpredictably cut them off from a critical piece of machinery.
Commerce Department spokesmen have promised to be reasonable and to deny licenses only for those Chinese entities that are known to have military end users. But other agencies may not agree on the degree of risk that the U.S. Government ought to be willing to run in trading with China. That brings us back to the original question: Should China be treated as a friend or foe? Unfortunately, the answer remains unresolved.
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