U.S. and Chinese officials are gearing up for a summit in Washington to discuss trade frictions and other economic issues this week. China has come under increasing pressure in Congress over its trade and currency policies, and intellectual property violations.
China says it's addressing the problems, but it's not doing so fast enough to please Washington.
When the two sides agreed last year to hold their semiannual economic talks, the idea was to discuss long-term strategic issues. But Treasury Secretary Henry Paulson, who is leading the U.S. negotiating team, is likely to have to use the meetings to fend off protectionist pressure from Congress.
"Hank Paulson has from the very get-go downplayed deliverables," says Daniel Rosen, founder of the New York-based China Strategic Advisory, who advises the government on China trade-related issues.
But Rosen says that Paulson has "got to deliver something," or raise the chances that Congress will pass punitive measures against China.
On Thursday, U.S. lawmakers petitioned the administration for a formal investigation into whether China is undervaluing its currency in order to unfairly boost exports.
Since the last meeting with China in December, Washington has slapped tariffs on Chinese paper imports and filed a case with the World Trade Organization over China's intellectual property violations. Rosen says tougher measures could follow.
"While it looks as though there's a real tempest afoot here, the fact is that the cases that have been pursued thus far have not been the ones that would really signal that we were going to the mat with Beijing over trade issues," Rosen says.
As a goodwill gesture, China has sent a purchasing mission to the United States. The estimated $16-billion shopping spree will barely dent China's trade surplus, which the U.S. put last year at $232 billion.
In another gesture, China's central bank said Friday it would allow its currency to rise or fall by 0.5 percent a day, up from 0.3 percent previously. The U.S. Treasury welcomed the move, but said the yuan had to appreciate faster in order to lower the trade surplus.
But economist Michael Pettis, a visiting scholar at Beijing University, says that's unlikely.
"In order to get the trade surplus to shrink, we need a very large, one-off appreciation in the currency," he says. "And the Chinese are too frightened by the potential social and banking implications of a big one-off rise in the currency. So everybody is stuck."
Pettis says the real reason for the trade surplus is rapid industrial economic expansion, which means Chinese produce more than they consume.
Beijing-based economist Zhong Dajun says that the less Chinese consume, the fewer fruits of economic growth they get to enjoy. He notes that China keeps much of the foreign exchange it gets from its trade surplus in U.S. Treasury bonds.
"When Chinese don't consume," he says, "all this wealth they've worked hard to create goes to finance foreigners' debt. It's not good for our people's livelihood. Our country still has many poor people. Of course, this is entirely the result of our country's economic strategy."
In a letter to The Wall Street Journal last week, Vice Premier Wu Yi said China is working to reduce its trade imbalance and boost domestic consumption. Wu will have a chance to make this case this week, when Paulson is expected to take her to Capitol Hill to face lawmakers who are calling for punitive legislation.
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