U.S. China Trade Dispute Resolution Progress, but Currency Roadblock Remains

By: Money_Morning

Jason Simpkins writes: The United States and China this week wrapped up a two-day meeting on trade that was aimed at cooling rising tensions between the two nations. Still, despite the progress, currency valuations and trade tariffs will continue to be a fixture of both countries' foreign policies.

The U.S. trade deficit with China this year could top $270 billion, surpassing the 2008 record of $268 billion. U.S. policymakers blame China's undervalued currency and government subsidies for the imbalance. China's disregard for intellectual property rights and bias towards its own domestic companies are also major points of contention.

In a rare show of conciliation, China during Wednesday's trade talks agreed to loosen some of its trade restrictions and better enforce intellectual-property rights on the Mainland -especially to curtail rampant software piracy that costs software makers an estimated $7.9 billion a year in lost revenue.

Among other things, China agreed to:

•Resume U.S. beef imports, which have been banned since mad cow disease was discovered in U.S. cattle in 2003.
•Establish software asset management systems for government agencies to more effectively implement software legalization.
•Hold further talks on how to verify compliance with legalization requirements.
•Provided new assurances that its efforts to promote domestic innovation wouldn't discriminate against foreign firms.
China's so-called "indigenous innovation" program has been of particular concern to Europe as well as the United States, as it mandates that government procurement favor Chinese products.

China was able to implement the program because it never signed the World Trade Organization (WTO) government procurement agreement that prohibits such favoritism - although it promised when joining the organization in 2001 that it would do so "soon."

China has agreed to provide a second revised offer to the WTO Government Procurement Committee before that body's final meeting in 2011.

U.S. Commerce Secretary Gary Locke said he hopes the meeting will set the stage for "even more impressive announcements" when Chinese President Hu Jintao meets with President Barack Obama next month.

Tensions Still High
Regardless of the progress made at the meeting, tensions remain high between the United States and China.

In fact, the WTO just days before the meeting ruled in favor of the United States on a key export dispute between the two countries. The WTO ruled that the United States was justified in slapping a 35% tariff on Chinese tires. That followed the WTO's October ruling upholding U.S. penalties imposed on Chinese industrial products, including steel pipes.

China's commerce ministry said it would appeal the WTO ruling, but both measures are likely to be sustained. That could be problematic for China, as the rulings could encourage other countries to file similar complaints.

"The Chinese side is deeply concerned about the possible negative impact from the panel's decision," the Ministry of Commerce said in a statement on its Web site. The ministry "will carefully study the panel's report and lodge an appeal at an appropriate time, in order to protect the lawful rights and interests of Chinese industries."

In addition to these protectionist measures, the key point of contention between the United States and China is the valuation of China's currency, the yuan.

U.S. officials have long complained that China keeps the yuan artificially undervalued to boost its exports. Meanwhile, China has argued that the U.S. monetary policy has eviscerated the dollar to such an extent that it no longer deserves to be world's main currency reserve.

China also has pointed out that from 2005 to 2008, the yuan rose 21.1% against the dollar, but the U.S. trade deficit with the country continued to widen.

Still, many U.S. lawmakers blame China for a large portion of the country's fiscal troubles.

Two U.S. Senators - U.S. Sen. Sherrod Brown, D-OH, and Olympia Snowe, R-ME - earlier this week failed in a last ditch effort to pass legislation to pressure China to revalue its currency. The two senators had hoped to attach the legislation to the $858 billion tax compromise President Obama and congressional Republicans reached earlier this month.

The House bill passed in September - The Currency Reform for Fair Trade Act (HR 2378 - was a largely symbolic measure that offered only the vague threat of repercussion for countries with undervalued currencies.

Language that would have required the Obama administration to impose duties on imports from currency-manipulating countries was taken out of the bill before it left the House Ways and Means Committee for a vote.

The U.S. trade deficit with China totaled nearly $229 billion in the first 10 months of 2010 - a 20% increase from the same period a year ago.

The House bill will die if the Senate fails to pass it before Jan. 5, but the rhetoric surrounding China's trade policies will live on.

"Addressing Chinese currency manipulation is vital to getting our economy back on track, which is why the Senate should act quickly," said Sen. Brown.

Source : http://moneymorning.com/2010/12/17/....

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