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SPECIAL REPORT CHINA IN THE US ELECTION


than any previous administration, launch- ing complaints over auto parts, solar cells, credit cards, chickens, rare earths and even kitchen sinks. However, a closer look shows that


punitive actions by the US against China are not nearly as wide-ranging or as ben- eficial as the candidates purport them to be. Furthermore, their bombastic claims may be putting the world’s most impor- tant bilateral relationship at risk. “US-China relations are very trou-


bled, for reasons that partly have to do with the economy and partly have to do with security,” said Tom Wales, deputy director of analysis for Oxford Analytica, a global advisory firm. “As long as things remain economically tough in both coun- tries, you’re going to have this kind of friction.”


Tit-for-tat


Te flurry of trade complaints the Obama Administration has launched against China are not without merit. “It rather depends on the company and the indus- try, but in general, Chinese companies do get much more significant subsidies, direct and indirect, than US companies receive,” Wales said. Te US also subsidizes its businesses,


of course, but it does so mostly in line with WTO rules – for example, offering income tax breaks for people or compa- nies that buy domestic solar products, rather than offering its solar companies direct subsidies like soft loans and grants. Lower-income countries like China


have more difficulty following WTO regulations, since the rules were written by and for high-income countries, said Yukon Huang, a senior associate at the Carnegie Asia Program and a former World Bank country director for China. For example, China has trouble subsidiz- ing its solar industry through tax breaks because many Chinese underreport or do not pay income tax. Of course, as a WTO member, China must still follow the rules or pay the penalty, Huang added. But while trade cases against China


may be valid, they are unlikely to do much to revive the US economy. Take the Obama Administration’s latest measure: Obama announced in late September in Ohio, a swing state and a major auto parts producer, that the US would bring a WTO case against China for providing US$1 billion in illegal subsidies to auto parts exporters between 2009 and 2011. Te US auto parts sector has suffered


in recent years; employment in the sector fell roughly 50% between 2001 and 2010. But that’s more likely due to massive increases in productivity in the industry than foreign competition, said Wales of Oxford Analytica. China is not even the major source of


competition for the US auto parts indus- try. China’s share of the US import mar- ket rose from 1.6% to 9.3% between 2001 and 2010, according to Oxford Analytica, but the country continues to lag behind Japan, Canada, Mexico and Germany as a supplier of auto parts to the US. And rapidly rising wages within China mean that its auto parts factories are becoming less competitive.


By some measures, the US-China relationship is not even America’s most embattled


“[Obama’s] action, particularly its


timing, is 100% politically motivated, [and] it’s just a very small gesture,” said Ian Fletcher, senior economist at the non-partisan Coalition for a Prosperous America. “Te US has been firing more complaints recently, but the thing that people tend not to understand is that these specific complaints are a very small part of the overall trading relationships.” By some measures, the US-China


relationship is not even America’s most embattled. As a proportion of total trade volume, disputed cases between the US and China are much smaller than those between Canada and the US or India and the US, said Li Chunding, an assistant researcher at the Chinese Academy of Social Science’s Institute of World Eco- nomics and Politics.


Money talks


Another source of popular misconcep- tions is the rhetoric surrounding China’s currency. While many Chinese now argue the renminbi is close to its real value, crit- ics (many in the US) charge that China still undervalues its currency by as much as 20-30% to subsidize its exports and raise the cost of imports. Romney criticizes Obama for failing


to right this perceived wrong, and he has pledged to label China a currency manip- ulator “on day one” of his presidency. He is not alone: Democrat Chuck Schumer


led the Senate in passing a bill that would impose an across-the-board tariff on any country that is labeled a currency manip- ulator, though the bill was later voted down in the House of Representatives. But it’s far from clear that China


deserves to be singled out as a currency manipulator. Te country does control the value of its currency, allowing it to fluctuate within a narrowly set band, but analysts say China is by no means the only offender, and perhaps not even the most egregious. Most countries manage their


exchange rates, often by tying their cur- rency to the value of the US dollar as China has, said Huang of Carnegie. “Te Hong Kong dollar has been HK$7.80 to the US dollar for a hundred years. Tey’ve never changed their exchange rate, but has anyone ever labeled them a currency manipulator? No.” Kenneth Lieberthal, the director of


the John L. Tornton China Center at the Brookings Institution, calls the cur- rency manipulator label “gratuitous” (see full interview on page 31). Te label would primarily trigger a series of nego- tiations with China, and “we’ve done that every day with China for years. So this is a distinction without a difference.” Te main purpose of labeling China a cur- rency manipulator would be to take a humiliating swipe at the country, Lieber- thal said. Some, like He Weibao, a researcher at


the Chinese Academy of Social Sciences’ Institute of American Studies, worry that this would invite Chinese retaliation in the form of a trade war. Because the US business commu-


nity – including many Romney backers – is wary of that prospect, some speculate that Romney would be unlikely to follow through on labeling China a currency manipulator if he is elected. Te US- China Business Council has registered its opposition to the plan, and Bloom- berg cited one unnamed Romney advisor as saying that all of the candidate’s top advisers also disagreed with Romney's decision. “Basically every US political chal-


lenger since 1992 has accused the incum- bent party of being soft on China on trade and in more recent years the cur- rency valuation issue,” said Wales of Oxford Analytica. “And yet every party when they get


into office soon realizes the size of the US-China trade relationship, [and]


China Economic Review • November 2012 29


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