This month Beijing is sending one of its largest delegations ever to visit America. Headed by the “Iron Lady of China,” Vice Premier Wu Yi, the group will participate in the second round of Treasury Secretary Hank Paulson’s Strategic Economic Dialogue, which begins in Washington next week.
In the last two weeks, Paulson has been trying to lower expectations for the upcoming discussions with the Chinese. That’s smart strategy. The first round of the dialogue, held in Beijing last December, was an abysmal failure. And the talks later this month are bound to be contentious: the Bush administration in March announced it would reverse decades of trade policy by imposing countervailing tariffs on products from non-market economies. The U.S. has also filed a series of World Trade Organization complaints against China: one in February and two more last month. The February case complains of nine discrete sets of manufacturing subsidies. The cases last month target both Chinese piracy of American intellectual property and China’s internal restrictions on the distribution of foreign films, music, books, and journals.
How important are these WTO cases to Beijing? Very—each touches on an essential part of China’s vast economy. Trade subsidies are vital to China’s competitiveness—they benefit about 60 percent of its exports, according to U.S. Trade Representative Susan Schwab. China’s theft of intellectual property is now tightly interwoven into the fabric of its economy. And the restrictions on legitimate distribution of foreign entertainment products and publications are essential to the Communist party’s control over ideas and its political monopoly.
Late last month Vice Premier Wu said Beijing would “fight to the finish” over the U.S. complaints. These words make it clear that we are heading for a rough patch in U.S.-China relations. Trade issues like these not only affect the foundations of China’s export economy, but also impinge deeply on political matters. The Chinese undoubtedly feel they have little room for compromise.
And fighting to the finish they are. Beijing capitulated on the first case Washington filed: against a preferential value-added tax rate for domestically produced or designed integrated circuits.* But the Chinese government has chosen to resist the second American complaint-relating to discriminatory auto-parts tariffs-even though it has little chance of success, and it will undoubtedly oppose the three cases just filed. The Bush administration may want to avoid a trade war with Beijing. But, as Wu Yi has indicated with her stark words, the Chinese think they are already fighting one.
*Through an editor’s error, this tax rate was originally mislabelled.
