Congress wary of trade deficit with China

Some senators condemn China's export practices. But economists say a trade war would be worse.

Last year, Americans sold just $1 of goods to China for every $6 of goods flowing the other way. That imbalance is tipping the scales in Congress toward confronting China about its trade.

The growing trade gap - nearly $202 billion in 2005 - threatens the US economy, some lawmakers say. They want China to end what they call unfair trade policies and an artificially low yuan, its currency.

But others say the greater danger lies in provoking a trade war with China, which could hurt the two biggest drivers of the global economy.

Those stakes pose a delicate challenge for America: finding the right balance between assertiveness and patience.

"There's strong bipartisan concern that this growing trade deficit with China is a serious problem," says Robert Scott, an economist at the Economic Policy Institute, a liberal think tank in Washington.

So far this year, Congress and the Bush administration have leaned hard on China's leadership. One Senate bill introduced Tuesday by Charles Grassley (R) of Iowa and Max Baucus (D) of Montana outlines new consequences for trade violations and artificially low exchange rates. Sens. Lindsey Graham (R) of South Carolina and Charles Schumer (D) of New York, meanwhile, have delayed a vote on their proposal to impose a 27.5 percent tariff on Chinese imports if the yuan's value doesn't rise.

The next few weeks could reveal whether the path ahead involves confrontation or common ground. Chinese leader Hu Jintao meets with President Bush in April. And the US Treasury Department is preparing to issue an assessment of whether China is manipulating its currency.

The blend of pressure and patience with China is already a well-worn balancing act for US officials. That's because both the economics and politics of the issues are tricky.

Many US companies are developing profitable operations in China and don't want to antagonize the nation that offers superior growth prospects. Wal-Mart, for example, recently said it expects to hire 150,000 Chinese workers as it expands retail operations there during the next five years.

By some measures, China may already be the world's No. 2 economy. And forecasters estimate that it could surpass America as the world's biggest economy by about 2040.

Economists say the two nations stand to reap big rewards from their expanding ties. The low-cost goods imported from China represent a boost in the purchasing power of American consumers - a kind of "China dividend" for the US standard of living.

And trade is flowing the other way too, with US exports booming last year.

In effect, many economists say the greatest risk is not the trade deficit but the prospect that a rift over trade could result in a resurgence of protectionism.

"Personally, I can think of no faster path to a worldwide recession than for the twin engines of the global economy - the United States and China - to turn against one another," Caterpillar Inc. chairman Jim Owens said in a speech to manufacturers last week in Illinois.

The company's exports of machinery to China have grown 40 percent in the past few years, helping to support 5,000 US jobs. The company is also adding workers rapidly in China.

Although trade and economic prosperity have historically gone together, critics say the US has not done enough to defend US jobs against unfair trade practices - especially in China.

Counting the number of manufacturing jobs lost due to trade is notoriously difficult. Many economists contend that even if China cut export subsidies and boosted the yuan by 25 percent, the impact on US employment would not be dramatic. Americans might simply import more goods from other nations.

But the effect on US manufacturers might be greater. An analysis by the Economic Policy Institute concluded that since 1989, the rising trade deficit with China has displaced production that supported 1.5 million US jobs.

The Grassley-Baucus bill would address currency imbalances and trade violations through a system of "engagement." "We need to engage China and other nations firmly, but with an eye to economic opportunities as well as economic concerns," Senator Baucus said.

Currency is a primary concern for the National Association of Manufacturers. With the yuan undervalued by some 20 to 40 percent, "it does confer a very significant artificial price advantage," says Frank Vargo, who specializes in trade issues at the association. "That's huge."

He hopes that the Bush administration will work with other nations to bring joint action against China to reform the exchange rate. "There really are no quick routes," says Mr. Vargo. "It's the one we prefer."