On Feb. 14, U.S. Trade Representative Rob Portman stepped to the microphone in Washington to report the results of a top-to-bottom review of America's trade relationship with China. "We believe right now the relationship is out of balance," declared the former Ohio congressman. "The relationship needs to be more balanced, more equitable."

Citing a litany of alleged abuses, Portman called for China to open its market to more American products; protect American software, movies, and recordings from piracy; and curtail trade practices that make it harder for U.S. companies to sell their goods and services in the world's largest country. He also pledged to aggressively pursue antidumping complaints and World Trade Organization action against Beijing, if bilateral talks fail to resolve disputes.

To some corporate executives and China-watchers, Portman's comments heralded a new, tough stance on the part of the Bush Administration that, if not handled carefully, could set off a trade war that ultimately could damage both American companies and the U.S. economy.

"NO FUNDAMENTAL SHIFT."

But the reality of the situation is far less confrontational. Rather than marking a new get-tough strategy, Portman's review reflected a continuation of a yearlong effort by top Bush Administration officials to prod China to cooperate on economic matters, and to convince the U.S. Congress to avoid extreme Beijing-bashing legislation that could prompt retaliatory action by China and WTO complaints against the U.S.

"There's no fundamental shift in policy," says one senior Administration official. "It's a complex relationship. There are changes and stops and starts, but we're continuing to work at it in a steady way."

The public review of the relationship between two global economic superpowers comes just two months before a planned visit to the U.S. by Chinese President Hu Jintao in April. It also precedes a determination by the U.S. Treasury Dept. as to whether it believes China manipulates its currency to gain unfair competition in international trade.

POLITICAL MANEUVER.

And it comes amid growing pressure from Capitol Hill to retaliate against China for perceived sins, ranging from human-rights violations to dumping Chinese products in the American market at unfairly low prices. The fact that the U.S. had a record $202 billion trade deficit with China in 2005 has only fueled political concerns in Congress.

Thus far, the Chinese government has been willing to cut the Bush Administration a great deal of slack to appear to respond to U.S. domestic concerns without rupturing the cooperative relationship between the two governments.

"China is sophisticated and understands U.S. domestic politics," says Andy Rothman, China macro strategist for CLSA Asia-Pacific Markets. "And if they get branded a manipulator, they will understand why. It has to do with U.S. domestic politics and isn't an attack on China." Rothman says the Bush Administration "is going to want to find a way to tamp down congressional protectionist sentiment before the [Hu] visit."

PRESSURE POINTS.

But top Chinese officials say they won't yield to threats or retaliation. "Pressure or even sanctions will neither contribute to the development of China-U.S. economic and trade relations, nor serve the interest of America itself," says Foreign Ministry spokesperson Qin Gang.

American officials say Chinese exports to the U.S. help American consumers by providing quality products at low prices. They also argue that the Chinese market has been a highly profitable investment for thousands of U.S. companies, from multinational giants to mom-and-pop operations. But the Bush Administration believes it can continue to prod Beijing to open up its market and revalue its currency through consistent pressure. Among the most likely steps:

-- Step up efforts to seek WTO redress for alleged violations of international trade rules. A case study: U.S. threats to file a complaint against China in a recent case involving linerboard, the corrugated material in cardboard boxes, resulted in the Chinese government rescinding its own antidumping order against U.S. boxmakers.

Portman calls it "a great result for U.S. industry, and exactly the kind of result we want to have." With that in mind, the trade rep says his office will "accelerate our analysis of potential cases."

-- Push China on intellectual-property issues. Hollywood, U.S. publishers, Internet service providers, and other high-tech companies are pressing the Administration to protect their products from piracy and Chinese government censorship. Portman points out that Chinese policies "negatively impact" industries where American companies have "a significant competitive...advantage" because of innovative products and domination of a market.

-- Seek further changes in the yuan. After months of tough talk from the Bush Administration, China last year made slight changes in the value of its currency, making U.S. products comparatively more affordable and competitive. China firmly denies that it has manipulated its currency to gain an unfair trade edge, but the Americans will continue to press for further revaluations.

One tool is an upcoming Treasury Dept. decision on whether China is improperly using its currency as an economic weapon. Some in the Bush Administration say that jawboning is a more effective way to prod China to change than the hammer of a manipulation finding.

-- Persuade Americans to save more. White House economists are convinced that a large part of the trade deficit with China is the result of macroeconomic factors. For instance, U.S. growth is running double that of other leading industrial countries, thus fueling demand for imported products. In addition, the U.S. savings rate is at an all-time low. If Americans consumed less and saved [or invested] more, the trade deficit would moderate, Bush officials believe.

-- Chalk up some trade victories. The Bush Administration believes it can cool off some of the protectionist heat if China is willing to make concessions to open its market to more American businesses. Among leading contenders are financial-services companies. The White House will push Beijing to change some of its rules to make it easier for U.S. companies to enter partnerships.

American and Chinese officials concede it's in their mutual interest for the economic relationship between the two countries to grow, despite major political disagreements and ongoing trade tensions. "This is an extremely important economic relationship," says Portman. Qin notes that "China-U.S. relations have achieved remarkable progress, which testifies to the fact that China and the U.S. share extensive interests."

Keeping that relationship alive -- and mutually beneficial -- is the challenge for Bush and Hu alike.


Sources: Business Week