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TRADE: US Complains to WTO as Deficit with China Creeps Up

Emad Mekay

WASHINGTON, Jul 12 2007 (IPS) - Just hours after new data showed an ever-widening U.S. trade deficit with China, Washington asked the World Trade Organisation (WTO) Thursday to arbitrate its dispute with Beijing over what Washington considers illegal trade subsidies.

The move escalates trade tensions that came to the fore during a high-level meeting here between the two economic giants in May.

Washington says that two rounds of WTO talks initiated by the U.S. in February failed to convince Beijing to go far enough in curbing its use of trade subsidies that Washington says violate its commitments to the Geneva-based WTO.

China says it has already repealed one form of the subsidies that Washington objects to about. But the U.S. remained unsatisfied.

“We continue to prefer a negotiated settlement to this dispute, but without assurance of complete corrective action by China, we must continue to pursue the WTO process to enforce our rights,” said Sean Spicer, spokesman for the United States Trade Representative.

Mexico joined the United States in its request for the WTO to sponsor the talks with China. In April, the two countries filed another supplemental consultation request after China removed one subsidy and passed a revised income tax law.

At issue are broader subsidy programmes that the United States believes are prohibited by the WTO Agreement on Subsidies and Countervailing Measures. These include alleged backing for China-based firms that use domestic rather than imported products, as Washington prefers, or for firms that export overseas rather than for local consumption.

Washington argues that a range of domestically produced goods in the United States, from steel to paper to computers, are denied an opportunity to compete in the Chinese market and in third country markets where they are forced to vie with highly subsidised Chinese imports.

The alleged Chinese subsidies cover sectors like steel, wood products and information technology, among others.

A fact sheet distributed by the USTR office earlier about the case said that among the tactics China uses to give its companies an edge over U.S. competitors were tariff exemptions, discounted lending rates and income tax reductions and refunds available to China-based companies that meet certain export performance benchmarks.

These benefits have appealed to many firms, especially from neighbouring Asian nations, which moved their final assembly operations to China since its accession to the WTO.

The subsidies being challenged by Washington purportedly go to foreign companies that invest in China and which meet those criteria. U.S. officials say those companies accounted for nearly 60 percent of China’s exports of manufactured goods in 2005.

This is the second dispute against China for which the United States has requested a WTO dispute settlement panel.

The United States, Canada and the European Community requested a WTO panel in September 2006 to probe China’s promotion of local content in the auto sector through extra charges on imported auto parts. Panel proceedings in that dispute are underway.

Tensions between the two trading powerhouses heightened further on Thursday after the U.S. Commerce Department said that the trade gap with China increased to 20 billion dollars in May, up from 19.4 billion dollars in April. China says that half of its trade surplus in June was because of exports to the United States.

The data released today show the U.S. trade deficit with China widened to 96 billion dollars for the year – a 15 percent year-to-date increase over 2006.

Several U.S. lawmakers have called for punitive measures against China, including labeling it “currency manipulator”, and have put forward several bills to stem the trade deficit with the Asian giant.

“It’s another month of deficit-busting trade policy with China – a nation that doesn’t play by the rules,” claimed U.S. Senator Sherrod Brown, who is a Democrat from Ohio, on Thursday.

“China manipulates its currency, exploits workers and environmental standards, and exports contaminated food, medicine, and products. Enough is enough. Our trade policy with China has been a disaster for our nation, and everyone except this administration recognises it,” he said.

But not everyone agrees that China is to blame for the U.S. economic woes. Stephen Roach, managing director and chief economist at Morgan Stanley, told the Chinese news agency Xinhua that: “The United States runs trade deficits not because it is victimised by unfair competition from China or anyone else but because it suffers from a chronic shortfall in domestic savings.”

“In its rush to impose trade sanctions on China, the U.S. Congress risks making a policy blunder of monumental proportions,” he said last week. “We don’t have a bilateral problem with China. We have a multilateral problem here. Blaming deficits on China won’t fix anything.”

Trade sanctions such as tax and countervailing duties, he said, “are functional equivalents of tax hikes on U.S. consumers and American multinational business. In response, China can put reciprocal tax on products sold to the United States and diversify China’s foreign exchange reserve from the U.S. dollar.”

Still, U.S. legislators are seeking to exploit the recent food contamination scare to pass measures against Beijing. They say that many Chinese products imported into the U.S. contain rampant safety violations and toxic substances. The lawmakers have issued many calls to the Bush administration to take action to ensure food imports meet U.S. health and safety standards.

In May, the United States and China agreed at the close of high-level meetings that China will take steps to open its financial and other services markets – moves that still fall short of the many sweeping measures U.S. lawmakers have been calling for to narrow the U.S. trade gap with the Asian nation.

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