U.S.-China Relations Are Widening Again




The global recession is re-exposing fissures in United States-China relations that Treasury Secretary Henry M. Paulson Jr. spent more than two years smoothing over.

Mr. Paulson, 62, who visited China 70 times during his career on Wall Street, made improving ties a priority when he arrived at the Treasury in 2006. He advocated diplomacy instead of confrontation, establishing a twice-yearly “strategic economic dialogue” with officials in Beijing, aimed at cooling tensions and deterring Congress from taking up trade sanctions.

The approach produced some results, including a pledge to share data on food safety and agreement to allow foreign mutual funds to invest in China’s stock market. The value of China’s currency, the yuan, rose 21 percent versus the dollar from 2005 levels to redress what American officials saw as an unfair price advantage for Chinese products.

But now, heightened tensions between China and the United States may worsen a contraction in world trade that already threatens to deepen and prolong the economic downturn. The friction comes as President-elect Barack Obama readies a two-year stimulus package worth as much as $850 billion that will require the United States to borrow more than ever from China, the largest buyer of Treasury securities.

“The American economic slump is running into the Chinese economic slump,” says Derek Scissors, a research fellow at the Heritage Foundation, a research group based in Washington. “It’s creating the conditions for a face-off between Beijing and the U.S. Congress, possibly leading to destabilization of the world’s most important bilateral economic relationship.”

American businesses, unions and lawmakers are already gearing up to force Mr. Obama’s hand. Unions and lawmakers plan to push measures to force China to raise the value of its currency.

The head of the Senate Finance Committee, Max Baucus, Democrat of Montana, plans legislation to raise tariffs on dumped imports from China and elsewhere. And new Democratic congressmen like Larry Kissell of North Carolina and Dan Maffei of New York have pledged actions to stop jobs from being shipped to China.

China’s exports declined in November for the first time in seven years, and economic growth may slow by more than half to as little as 5 percent in 2009, according to the Royal Bank of Scotland. That has prompted China’s leaders to increase tax rebates on thousands of exported products; meanwhile, the yuan’s steady rise against the dollar stalled in July, and the currency has barely budged since.

American companies are preparing trade complaints that could lead to increased tariffs. Lawyers representing companies like Nucor, a large steel maker, NewPage, a maker of coated paper, and smaller textile and steel pipe makers say they are considering new trade complaints against China. Policies in both countries are shaped by the need to cope with steep falls in employment.

More than 10 million migrant workers lost their jobs in China in the first 11 months of this year, Caijing Magazine reported, citing a Labor Ministry official.