Obama and U.S.-China Economic and Trade Relations

The U.S.’s new president Barack Obama has taken office and his economic stimulus plan was already announced on January 15th. But, what kind of influence will this plan have on U.S.-China economic and trade relations? Will it intensify trade protectionism against China?

To answer this kind of question, we have to take a look back at history.

In the past 36 years, the depth and range of U.S.-China economic and trade relations have far exceeded the bold imaginations of the pioneers in bilateral relations long ago. The two countries are each others’ second largest trading partners. For several consecutive years, China has been the U.S.’s second largest foreign holder of treasury bonds, invoking Niall Ferguson, a professor of economic history, to coin a new English term called “Chimerica” to explain this type of relationship.

In terms of U.S.-China economic and trade relations, the most “eye-catching” parts are undoubtedly the U.S.’s trade protectionism and economic and trade disputes. Going back to its origins, we find that U.S.-China economic and trade conflicts started not long after both sides established normal economic and trade relations. In July 1979, both countries signed the “Agreement on Trade Relations between China and the United States” and that year the U.S. unilaterally announced seven types of quotas on Chinese textile exports. In the past 20 years, China’s economy developed rapidly, making the U.S. attach greater importance to China’s market potential. China and the United States signed a bilateral agreement on China’s accession to the WTO, which former U.S. trade representative Charlene Barshefsky claimed was “the capstone of the nearly 300 trade agreements negotiated by the Clinton administration.” However, China rapidly became an exporting giant and made some U.S. interest groups feel threatened. The scale of U.S.-China economic and trade relations expanded, and China became one of the world’s largest countries with a trade surplus and, according to U.S. statistics, the largest source of the U.S.’ trade deficit.

Along with these trends, U.S.-China trade conflicts became increasingly intense, including sectors such as textiles, clothing, agricultural products, anti-dumping, intellectual property rights, and arrangement of the RMB exchange rate. The U.S. became the country with the most intense and numerous trade conflicts with China. During a global economic and financial crisis, the tendency towards trade protectionism will rise in the world. During his campaign for the presidency, Obama made some comments that had a protectionist feel (such as putting pressure on China to raise the RMB exchange rate, supervising and restricting China’s textile exports, etc.). Such comments garnered some publicity and stirred up feelings of uneasiness among China’s business and political circles.

The author’s view is that the main content of Obama’s economic stimulus plan is about building infrastructure and investing in and cutting taxes for certain industries. It is not about trade protectionism, and his new economic policies will not directly worsen bilateral conflicts regarding the economy and trade. However, the following will indirectly cause conflicts, and China must adopt corresponding countermeasures:

First, the large-scale building of infrastructure included in Obama’s economic stimulus plan will create a market with relatively sound paying ability and will certainly attract factory owners from other countries, who will come and compete. U.S. factories are bound to use all types of methods, including market protectionism, to prevent enterprises from China and other countries from sharing the benefits. The building of infrastructure will especially require large purchases of steel products, and since there has been a long-running slump in the U.S.’s domestic steel industry, this will be seen as a good opportunity to save this industry. China’s steel industry has long been the world’s largest steel producer, having a long lead on other countries. Competition has grown increasingly intense and it is inevitable that there will be growing competition between China’s and the U.S.’s domestic steel enterprises in the U.S. infrastructure development market. Seeing that the U.S.’s steel industry is accustomed to resorting to trade protectionist measures, we can almost be sure that they will use such measures in the future.

Secondly, in the past few years China has greatly strengthened the development of advanced manufacturing industries. This economic and financial crisis has been seen as a good opportunity to promote the rise of industries and, therefore, more quickly escape from the influence of outside economic impacts. Considering that the U.S. is the base of free market capitalism and always wary of using terms like “industrial development policies,” one of the noticeable characteristics of Obama’s economic stimulus plan is to provide large-scale financial investments for renewable energy and IT industries.

By relying on the U.S. government’s financial support, certain U.S. industries are strengthening their ability to dump goods in the global market, worsening conflicts with China’s plan to work hard in developing advanced manufacturing industries. We estimate that in the next two years, China will moderately increase its use of such instruments as antidumping, anti-subsidy, and safeguard measures to secure domestic markets for domestic industries (especially the development of important advanced manufacturing industries). There will be an increased probability that these U.S. industries, which will dump goods, will clash with the Bureau of Industry Injury Investigation and Bureau of Fair Trade in China’s Ministry of Commerce. Therefore, the author advocates that we change our way of thinking; we should not always make ourselves the passive victims of trade protectionist policies. Instead, we should be proactive in striving for the fairest treatment of China’s industries. For example, now, we should quickly begin analyzing the industrial development policies in Obama’s economic stimulus plan and see if they fit the criteria for illegal subsidies, as outlined by the World Trade Organization.

It does not just end here. Obama’s economic stimulus plan may also have the following negative effects on China.

Even if we do not consider Obama’s $825 billion economic stimulus plan, the U.S.’s deficit for the 2009 financial year can reach $1.2 trillion. If Obama’s plan can be adopted and implemented smoothly, the funds can only be raised through issuing bonds. The scale of newly issued bonds will be large, and this will be disadvantageous for a long-time creditor like China.

Because the scale of fundraising for this economic stimulus plan will be unprecedentedly large, the crowding out effect on developing countries and areas in the credit and bond markets will become increasingly noticeable. His economic stimulus plan might decrease China’s ability to pay for imports from emerging markets, which China has been trying to expand. This is disadvantageous for our strategy of having a multifaceted market.

Despite this, there are still some factors that restrict the negative influences of Obama’s economic stimulus plan on China. Some of Obama’s protectionist propositions are not compatible with the goals of his other propositions and, therefore, cannot be implemented. For instance, U.S. importers and manufacturers often have a conflict of interest. A few years ago, U.S. furniture factories appealed to have restrictions placed on imports of Chinese furniture, and certain U.S. sellers announced that they would break off business relations with the people who initiated those restrictions, even throwing the products from those factories onto the streets. This time, the Association of Importers of Textiles and Apparel clearly stated its hopes that the Obama administration would completely get rid of import duties on textile products. This viewpoint will restrict the manufacturing industries’ protectionist philosophy.

Obama advocates increasing the RMB exchange rate in order to “create a level playing field” for U.S. manufacturers. However, this is not just incongruent with the basic characteristics of the current international currency systems and the present international economic situation; it is also incompatible with Obama’s ultimate goal. The supremacy of U.S. currency is the ultimate manifestation of economic supremacy, and economic supremacy is the basis of political and military supremacy. In turn, political and military supremacy consolidate economic supremacy. So, when the subprime lending crisis stayed on U.S. soil, participants in the market fled from the U.S. dollar one after another.

Once Uncle Sam turned this domestic crisis into a global crisis, market participants had to run toward the U.S. dollar and increase the U.S. dollar exchange rate. In order to make up the deficit and pay up current obligations in the midst of a rush to deleverage, institutional investors liquidated investments and increased appreciation pressure on the RMB and other currencies in relation to the U.S. dollar. Because of this, at the start of the subprime lending crisis in 2008, the theory of Asian emerging markets cutting ties to the U.S. became popular. Asia and the BRIC’s found their currencies appreciating in relation to the U.S. dollar. However, in October 2008, in the midst of a rapidly worsening subprime lending crisis, the exchange rate of the RMB to the U.S. dollar took a turn for the worse even though China’s economic trend was good. Furthermore, Obama’s ultimate goal is to end the subprime lending crisis as soon as possible and revitalize the U.S. economy, but if he can truly improve the U.S. economy, the U.S. dollar will rise again.