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China-US Ties: Hostage to Asymmetric Trade

, June 12, 2013, 0 Comments

The Chinese President Xi Jinping’s visit to the US and the rather facile meetings and discussions he had, re-emphasized the awkward and uneasy nature of the Sino-US relationship that both countries are trying hard to brush under the carpet, albeit unsuccessfully.

The visit was in the backdrop of several thorny issues. The biggest of these was, the US concerns over cyber-hacking by China. The concern was accompanied by visible US embarrassment over the disclosures of a former CIA employee on surveillance of ordinary US citizens and the fact that he is currently located in China (Hong Kong) and is a potential asylum-seeker.

Other contentious issues included the usual disagreements in Sino-US ties: the difference over intellectual property (IP) rules and regulations, restrictions on US hi-tech exports to China, US unhappiness over the management of the RMB and a bilateral trade deficit becoming more unsustainable over time.

Though the shrill rhetoric over currency ‘manipulation’ by China was mostly missing during Xi’s visit, there were enough on the plate to block a Sino-US tango. Indeed they did with the visit hardly producing any forward-looking outcomes. Apart from the declared intention to work together on reducing carbon emissions not backed up by a firm plan of action, the other issues remained unresolved. Body language and personal chemistry – often cited as the best indicators of bonhomie exuded at high-level visits – were bereft of back slapping and firm handshakes with both Xi and Obama maintaining enough distance to discourage hugs and embraces, much to the chagrin of photographers.

There are obvious tensions surrounding the US-China bilateral ties. This is not unexpected given that the unipolar character of the world economy and polity is gradually changing. Many would classify the change as a challenge to the global hegemony of the US following the rise of China. While there might be other explanations and perspectives on the change, there is no denying that the US and China represent most of the stark contrasts characterizing the modern world economy: differences in economic structures between the OECD economies and large emerging markets, dissimilar comparative advantages and interests in global trade of the two groups, and the changing economic balance and equation between a robustly growing and much younger Asia and the East, vis-a-vis an economically stagnant and ageing West, represented by the US and Europe.

Much of the uneasiness between the US and China arises from their asymmetric trade relationship. The relationship reflects the typical asymmetric pattern of exchange between the East and the West, where the former produces much of what the latter consumes. There is no better example of the asymmetry than the US-China trade.

The size of the US-China trade was US$147 billion in 2002. Over the next ten years, the trade has increased to US$536 billion marking a 360 per cent increase in size at an annual average rate of around 35 per cent. The remarkable rate of growth in size of trade has been accompanied by a similar increase in its asymmetry. From a surplus of US$103 billion in China’s favour in 2002, the balance has swelled to US$315 billion reflecting a 300 per cent increase in the surplus at an annual rate of almost 20 per cent. At US$315 billion, the surplus is larger than the size of the economies of Denmark, Malaysia and Singapore, and more than double those of Bangladesh, New Zealand and Hungary.
Given that the US and China are part of probably the world’s largest asymmetric exchange relationship, the imbalance is only expected to influence mutual perspectives. The US, for several years, has been expressing its angst over the rising imbalance without being able to correct it. The anguish turned hyperbolic after the financial crisis of 2009. Demand for change in China’s currency management practices became vociferous along with rising tirade over Chinese policies restricting market access such as those on government procurement and indigenous innovation.

China has been conscious about the US unhappiness over the asymmetric trade relationship underpinning the command of Chinese products and producers over the US market. Matters have not been helped by handsome Chinese purchases of US debt.

There is no denying that China has used the Yuan and other domestic regulations for consolidating its export advantage. It is difficult to call these practices unfair given that the US and other OECD countries have for long been enhancing comparative advantages of their producers through generous subsidies and market support. In the messy game of snatching global markets through covert state-driven initiatives, China has been more successful than the US in recent years making America wary of a tacky opponent gaining the upperhand it in its own game.

The trade asymmetry will remain as will the itches and aches it produces. High-level visits are merely efforts to put soothing balms on the aches. Removing generic aches require much more than balms.



This article first appeared in the Financial Express  print edition on June 12, 2013

About author
Dr Amitendu Palit is Head (Partnerships & Programmes) and Visiting Senior Research Fellow at the Institute of South Asian Studies (ISAS) in the National University of Singapore. Dr Palit worked in India’s Ministry of Finance for a decade and handled India’s external sector, industrial and infrastructure policies. ...more