May 5 Senior U.S. and Chinese officials will
grapple with the vast and sometimes contentious relationship
between the world's two biggest economies in two days of talks
in Washington on Monday and Tuesday.
Here is an explanation of the issues that may be discussed
at the latest annual Strategic and Economic Dialogue.
U.S. TRADE DEFICIT, CHINA'S SURPLUS
A key cause of trade friction between Beijing and
Washington is the U.S. trade deficit with China. Despite a
pledge by both countries to work together on overcoming global
imbalances, the U.S. trade deficit with China in 2010 rose to
$273.1 billion, a 20.4 percent increase from the shortfall in
2009. That surpassed the record of $268 billion set in 2008,
illustrating how heavily China still relies on exports to the
United States to fuel economic growth. China's own figures
showed its overall trade surplus narrowed in 2010 for the
second straight year. The 2010 surplus was $183.1 billion, down
from $196.1 billion in 2009 and nearly $300 billion in 2008.
China's currency policies have been a major irritant in
ties for several years and a focus of U.S. congressional anger
at China since at least 2005. Contention over the yuan exchange
rate has cooled a bit this year, but remains strong. Many U.S.
lawmakers believe the yuan is undervalued by 15 percent to 40
percent, giving Chinese companies an unfair price advantage in
China loosened its currency from a nearly two-year peg to
the dollar in June, and this year the People's Bank of China
has guided the yuan to record highs. It has now appreciated
about 5 percent since June 2010.
Policymakers in Beijing have made it clear they will deploy
the currency as a weapon to fight inflation, which hit a
32-month high of 5.4 percent in March. With prices moving up
much more rapidly in China than the United States, the yuan's
real exchange rate has risen about 10 percent since last June.
U.S. Treasury Secretary Timothy Geithner said on May 3 that
China would be better off allowing for a faster nominal
appreciation that would help temper inflation.
The U.S. Treasury was scheduled to issue a semi-annual
report on April 15 on the currency practices of U.S. trade
partners that, in theory, could have labeled China a foreign
exchange manipulator. That report has been delayed indefinitely
and it is likely the Obama administration will opt for
continued behind-the-scenes persuasion rather than roiling the
diplomatic waters by calling Beijing a manipulator looking for
a trade edge.
The Obama administration faces continued calls from
Congress to do more to pressure China. The U.S. House of
Representatives approved a bill last September pushing the
Commerce Department to treat currency undervaluation as a
subsidy under U.S. trade law. That would allow U.S companies,
on a case-by-case basis, to ask for steeper countervailing
duties against Chinese imports than they currently can. The
bill died when the Senate did not hold a vote before its term
expired at year end.
After a trip to China in late April, however, Senator
Charles Schumer, a prominent Democrat from New York, said he
was "more convinced than ever" of the need to pass legislation
to force China to raise the value of the yuan. However,
Republican leaders in the control of the House have said they
have other priorities.
U.S. DEBT LEVELS
China has the world's biggest foreign exchange reserves.
They rose by nearly $200 billion in the first quarter to $3.05
trillion, with about two-thirds estimated to be invested in
Beijing has a big interest in protecting the value of those
dollar-denominated assets and has repeatedly nudged Washington
to give public assurances about government debt levels and the
strength of the dollar.
After ratings agency Standard & Poor's slapped a negative
outlook on the United States' top-notch AAA credit rating in
April, China urged Washington to protect investors in its debt.
But China has little choice but to keep its dollar-denominated
debt for now, and that deters the government from voicing any
worries about U.S. fiscal policy more loudly.
China has repeatedly warned that loose U.S. monetary policy
risks undercutting the dollar, but it has continued to
accumulate dollar assets. It bought about $260 billion of U.S.
Treasury securities last year, according to U.S. data. With the
Chinese government determined to limit yuan strength, it must
buy a large amount of the dollars streaming into the country
from its trade surplus, and it recycles those into U.S.
The state of talks in Washington over cutting the U.S.
budget deficit, on course to hit $1.4 trillion this year, will
no doubt be a subject of discussion, as will the Obama
administration's related effort to convince lawmakers to raise
the $14.294 trillion limit on the U.S. government's debt.
Geithner has said China has confidence Congress would
ultimately vote to raise the debt ceiling. If it fails to, it
would ultimately lead to a first-ever U.S. debt default.
PIRACY AND COUNTERFEITING
China has long faced American companies' ire about
widespread unauthorized copying of software, music, films and
other products -- from luxury goods to industrial machinery.
The International Intellectual Property Alliance, which
represents U.S. copyright industry groups, has estimated U.S.
trade losses in China due to piracy at $3.5 billion in 2009.
Meanwhile, U.S. customs officials say 80 percent of the fake
tennis shoes, clothing, luxury bags and other goods they seize
each year at the border come from China.
China says it is making progress against intellectual
property piracy and launched many enforcement campaigns to
stamp out bootlegged books, music, DVDs and software. Still,
all are still openly available in Chinese shops and street
stalls. China remains on the U.S. "priority watch list" of
countries deemed to have serious copyright and trademark
Microsoft (MSFT.O) and other members of the Business
Software Alliance in the United States complain nearly 80
percent of the software installed on personal computers in
China is pirated. They have called for a "results-based" deal
to boost U.S. software sales and exports to China by 50 percent
in two years. China has said it is making progress in its
campaign to ensure government offices do not use pirated
software. Two-fifths of central government offices were using
legal software and another two fifths were buying it, an
official from China's National Copyright Administration said.
INDIGENOUS INNOVATION, STATE-OWNED ENTERPRISES
Big U.S. companies like General Electric (GE.N) are worried
that China's industry-supporting "indigenous innovation"
policies could make it more difficult for them to compete in
China. The "indigenous innovation" regulations are intended to
promote innovation within China and reduce its dependence on
foreign technology and companies.
U.S. industry fears China is using discriminatory policies
in areas from government procurement to technical standards and
tax policy to promote its state-owned enterprises at the
expense of foreign firms.
U.S. companies are also worried that under indigenous
innovation, they may be forced to transfer development and
ownership of intellectual property to China to participate in
the country's huge government procurement market.
President Hu Jintao and other Chinese leaders have
indicated goods produced by Chinese affiliates of U.S. and
other foreign firms would be considered indigenous innovation
products. But the Obama administration and U.S. businesses have
said they want stronger follow-up from Beijing to ensure that
commitment is kept.
U.S. companies also complain that state-owned enterprises
receive many other unfair advantages from the Chinese
government. U.S. officials have said they would push in various
forums for rules to establish a "competitively neutral
environment" for state-owned enterprises.
China, which controls 97 percent of available global rare
earth supplies, has alarmed its trading partners by restricting
exports of the minerals which are used in a variety of clean
energy and high-industry technologies. The U.S. Chamber of
Commerce has pressed the United States to secure a commitment
from China to remove rare earth export taxes and quotas, and
the United Steelworkers union also raised concern about the
issue in a petition to the U.S. Trade Representative.
China has defended its restrictions as measures to manage
supplies and control pollution associated with rare earth
production. USTR officials have said they are looking at what
action they can take, and note they have challenged other
Chinese export restrictions at the World Trade Organization.
U.S. EXPORT CONTROLS AND INVESTMENT BARRIERS
Beijing complains that Washington, while pushing for
greater access for U.S. firms in the Chinese market, imposes
unwarranted restrictions on Chinese investment in the United
States, often citing national security concerns. China says it
wants a level playing field for its investment into the United
States, saying that its intentions are benign and will benefit
the U.S. economy and create jobs.
A new report this week estimates that China's outward
investment in new greenfield projects or mergers and
acquisitions could increase sharply by 2020 to an estimated $1
trillion to $2 trillion. The United States says it is open to
Chinese investment in all but a few cases, but accuses China of
blocking investment completely in some industries or imposing
onerous conditions on foreign companies.
China says it would also buy more from the United States if
not for overly restrictive U.S. controls on high-technology
goods. The United States says China's argument is overstated,
but it is in the process of reforming its export control
system, which could lead to increased sales of some
Experts say better Chinese protection of U.S. intellectual
property is a prerequisite for any major easing of export
controls. Without that, say analysts, U.S. tech exports will
taper off as Chinese firms copy the products.
(Reporting by Chris Buckley and Doug Palmer; Editing by Chizu