Chinese Trade under Scrutiny: Who's Being Unfair to Whom?

WASHINGTON, JUNE 2, 2008 -- Over the past several years, China's rapid economic growth and ballooning trade surplus with the United States have brought its trade practices under increased scrutiny. As Eswar Prasad of Cornell University observes, looking at China's economic development elicits two conflicting types of "Oh my gosh!" statements: "Oh my gosh, China is going over a cliff!" or "Oh my gosh, China is going to take over the world!"

On June 2, AEI assembled a panel of experts to address these seemingly contradictory concerns about China's interaction with its trade partners and offer their views on the most appropriate economic policies toward China.

Brad W. Setser of the Council for Foreign Relations pointed out that the "phenomenal" expansion in China's overall trade and its trade surplus with the United States is at least partially due to market interventions by the Chinese government. Setser noted that China's exchange rate policy has left the yuan undervalued by 20-25 percent. Scott Paul, executive director of the Alliance for American Manufacturing, commented that China's undervalued currency and its lack of adherence to World Trade Organization rules creates a "China price," placing U.S. companies at a distinct competitive disadvantage. Setser and Paul suggested that the International Monetary Fund and the U.S. government should be more proactive in persuading the Chinese to allow greater flexibility in their currency and to play a more constructive role in reducing global payment imbalances.

AEI resident scholar Philip I. Levy cautioned against overemphasizing the bilateral U.S.-Chinese trade imbalance, as a large trade deficit is not necessarily evidence of unfair trade practices. Decreased imports from China might have no substantial impact on American workers, as the United States would simply look to other Asian trading partners to replace those goods. Levy also highlighted the difference between market interventions that violate international agreements--such as WTO trade dispute cases--and those that do not. Interventions that do not specifically violate international agreements, exchange rate manipulation, for example, are more difficult to handle, but Levy advocated negotiation, rather than threats.

Cornell's Prasad suggested that despite certain frictions, the future of U.S.-Chinese bilateral trade was bright. He noted that China's economic performance has not only helped to lift its own people out of poverty but has also brought benefits to the United States in the form of cheaper imports and new sources of investment financing. Any policy that would jeopardize the future development of the U.S.-Chinese trade relationship has the potential to do far more harm than good, he said.

--SCOTT GANZ and YI KANG

For video, audio, and more information about this event, visit www.aei.org/event1727/. For media inquiries, contact Véronique Rodman at vrodman@aei.org or 202.862.4870.