Sino-U.S. trade ties face test amid global slump

BEIJING (Reuters) - Trade frictions between Beijing and Washington are expected to grow amid a deepening world recession and as U.S. interest groups demand President-elect Barack Obama put “tough on China” trade talk into action.

Chinese workers make clothes at a textile company in Nantong, east China's Jiangsu province in this December 10, 2005 file photo. Trade frictions between Beijing and Washington are expected to grow amid a deepening world recession and as U.S. interest groups demand President-elect Barack Obama put "tough on China" trade talk into action. REUTERS/China Newsphoto

The U.S. Trade Representative’s office on Friday announced it had begun legal action at the World Trade Organization (WTO) aimed at halting Chinese government subsidy programs to boost the sale of Chinese-branded goods around the world.

The action, against a patchwork of cash grants, preferential loans and other incentives paid to Chinese exporters, follows recent U.S. moves to put import duties on Chinese goods, including steel products, paper and off-road tires.

China, where millions of workers have been laid off in recent months amid slowing exports, has protested against the charge, casting incentives given by local governments to exporters as merely one-off, symbolic “rewards.”

Obama, who has pledged to place more pressure on China over its export subsidies and managed currency, stands to inherit a long list of trade disputes that will test already thorny relations with its second-largest trading partner.

“The U.S. has set a bad example to other members of the WTO in its anti-subsidy action,” said Ren Yifeng, of WTO research group affiliated to China’s Commerce Ministry.

Obama’s trade dispute task-list is likely to grow, as labor and industry groups push agendas that will place him on a delicate tight-rope -- to be seen to be protecting U.S. jobs while avoiding a potentially disastrous trade war with Beijing.

“The new administration will come under unprecedented political pressure from its own base and from a wide range of industries,” Chris Padilla, a former under secretary of international trade in the Commerce Department, told Reuters.

The pressure would “force it to take decisions early in its new term,” said Padilla, who expected a “large increase” in anti-dumping and countervailing cases against China, and demands for new curbs on Chinese imports.


U.S. labor and trade groups will also browbeat the incoming administration to brand China a currency manipulator, potentially opening the door for other steps to pressure Beijing, including a possible complaint to the WTO.

China’s exchange rate with the United States is a festering complaint of many U.S. manufacturers who say Beijing deliberately undervalues its currency to boost exports.

“We are very committed to seeing some strong action on China’s currency,” said Thea Lee of the AFL-CIO labor group.

Obama, who said that China’s yawning trade surplus with the U.S. was “directly related to its manipulation of its currency value,” had backed legislation that would designate currency manipulation as a subsidy under U.S. trade remedy laws, noted Gil Kaplan, chairman of the Committee to Support U.S. Trade Laws.

“That was important legislation and I hope Obama will push forward some kind of legislative solution on currency manipulation,” said Kaplan.

While placing pressure on China to raise the value of its currency, the Bush administration has resisted branding China a currency manipulator.

Beijing has allowed the currency to rise 20 percent against the dollar since abandoning a long-held peg against the U.S. dollar in July 2005. But the currency has barely moved since the middle of the year amid worries over possible capital outflows.

With Chinese exports unexpectedly falling 2.2 percent in November, the first drop in seven years, Beijing has given short shrift to calls to further devalue the currency.

“With shrinking demand in overseas markets, the role of the exchange rate in stimulating exports will be limited -- it is a measure not worth taking,” Chinese Commerce Minister Chen Deming told the People’s Daily newspaper on Wednesday.

Beijing, conversely, has issued a raft of incentives to boost exports in recent months, including raising tax rebates and scrapping export taxes, amid concerns that rising unemployment could spark broad social instability.

As both countries’ exporters scramble to compete for a shrinking pool of customers, trade frictions were inevitable, but unlikely to spark a protectionist backlash in China, said Zhang Hanlin, a professor with the University of International Business and Economics in Beijing.

“Protectionist actions will be our last resort if the U.S. seriously violates regulations and agreements and harms China’s interests,” said Zhang.

Additional reporting by Doug Palmer in Washington and Yu Le in Beijing; Editing by Nick Macfie