Analysis: Deficit and dogma to frustrate Hu, Obama on trade

BEIJING/WASHINGTON Tue Jan 11, 2011 8:45am EST

1 of 2. A woman pauses as she shops at a wholesale market in Yiwu, Zhejiang province, China, January 11, 2011.

Credit: Reuters/Carlos Barria

BEIJING/WASHINGTON (Reuters) - China is slowly delivering on a vow to cut its overall trade surplus, but the structure of global commerce and a raft of pro-export policies ensure that its trade advantage over the United States will cloud relations between the two for years to come.

That increasing divergence -- the shrinking of China's overall surplus in contrast with a growing imbalance with the United States -- sets the stage for frustrating trade talks when Chinese President Hu Jintao visits Washington next week.

The United States will point to a bilateral trade gap which grew 26 percent last year to $181 billion, according to Chinese data, as evidence of the problems. In response, China can say its total surplus, at $183 billion, is down nearly 40 percent from its pre-crisis 2008 peak.

Whether U.S. President Barack Obama pushes for faster yuan appreciation or more market access for U.S. firms, Hu will be able to argue that China is doing its part to resolve the imbalance, and the onus is on the United States.

"The U.S. had a trade deficit with 92 countries in 2009. So, the United States doesn't just have problems with China and it has little to do with the renminbi," said Zhou Shijian, a senior fellow at the Center for U.S.-China Relations at Tsinghua University in Beijing.

"It is an old problem, a structural problem, that has been around for more than 10 years," he added.

Jeremie Waterman, senior director for China at the U.S. Chamber of Commerce, agreed that structural factors contribute to the huge trade imbalance, but said Chinese government policies are also to blame.

"They've clearly pursued over a number of years very much an export strategy as part of their development," he said. "If China were truly a market economy, they would not have the kind of export numbers that they do."

Barriers to China's services sectors also prevent U.S. financial, telecommunication and express delivery companies from doing more business there, Waterman said.

PROCESSING FRICTION

Last week, Chinese Vice Minister of Commerce Jiang Yaoping said the root of the U.S. trade imbalance had less to do with the value of the yuan and more to do with the nature of China's processing trade, in which multinational firms import intermediate goods and assemble them into products for export.

Jiang said those products are only partially manufactured in China, but recorded as Chinese exports.

"We have adjusted the yuan's exchange rate since 2005, but we can see that China's trade surplus with the United States, especially the surplus in the processing trade, basically did not change," Jiang told a forum.

"That is to say, the yuan's exchange rate has no big impact on the trade surplus," he said, adding that 80 percent of the U.S. trade deficit stems from U.S. firms' operations in China.

Independent researchers back up that claim.

A paper by the Asian Development Bank Institute published in December noted that high-tech products such as laptops and mobile phones sold by U.S. firms contribute to China's bilateral surplus, at least from a statistical perspective. The iPhone alone added $1.9 billion to the gap between the two countries in 2009, its authors, Yuqing Xing and Neal Detert, said.

Examination of the data shows the Chinese advantage is not what it seems.

Assembly in China contributed just 3.8 percent of the value of 'made-in-China' iPhone sales to the United States. The rest of the $1.9 billion comes from items such as touch screens produced in Japan and a camera produced in Germany, Xing and Detert found.

Accounted for properly, the iPhone would add just $73.5 million to China's bilateral trade surplus with the United States.

"Bilateral trade imbalances between a country used as a final assembler and its destination markets are greatly inflated by trade in intermediate products. These statistics provide a distorted picture about bilateral trade imbalances," they concluded.

BREAK IN THE CLOUDS

Appeals for a more nuanced understanding of global trade structure may not go down well in the United States, where the unemployment rate remains close to double digits.

Still, there are some changes that augur well for a narrowing of the two giants' trade gap over time.

China's voracious appetite for commodities is now spreading to agricultural products, an area where the United States with its vast, modern farms is well placed.

China buys 60 percent of the soy that is globally traded, and much of its supply comes from the United States.

In 2010, China also became a major importer of U.S. corn for the first time in 15 years. And U.S. beef shipments to China may pick up strongly after Beijing agreed to lift a ban imposed in 2003 on fears of mad cow disease.

A business delegation will accompany Hu on his trip, and about a dozen corporate executives from each country are expected to join Obama and Hu at the White House.

That could lead to deals worth potentially billions of dollars for U.S. companies if Chinese Premier Wen Jiabao's recent visit to India, where $16 billion in deals were signed with Indian firms, is any indication.

From Beijing's perspective, these gains only serve to illustrate that it is up to the United States to produce what China needs and to remove bans on exports of high-tech goods that Washington fears may be put to military use.

"We must look at the trade imbalance from a global perspective, and that means the United States must work hard to increase its own exports," said He Weiwen, a trade expert at the University of International Business and Economics in Beijing.

(Additional reporting by Simon Rabinovitch and Zhou Xin; Editing by Alan Wheatley and Daniel Magnowski)