Government Officials Move On China Trade

Government officials last week moved on two fronts to attack the United States/China trade deficit.
The US Trade Representative filed a complaint with the World Trade Organization (WTO) charging
illegal subsidies, and members of Congress introduced punitive tariff legislation to offset what
they say is China’s illegal currency manipulation. The US trade deficit with China currently is
about $220 billion with $27 billion in textiles and apparel.

In the WTO complaint, US Trade Representative Susan C. Schwab charged China is employing
several subsidy programs to give its industries an unfair advantage in international trade. Among
the issues cited are export subsidies and tax policies that the US government contends work against
fair competition with US and other foreign firms. “We are committed to challenging China’s
WTO-inconsistent practices that harm American workers and manufacturers,” Schwab said. “China’s use
of market-distorting subsidies creates an uneven playing field, and we are seeking to level the
playing field to allow US manufacturers to compete fairly with Chinese firms.”

The complaint triggers a 60-day period in which the two countries can attempt to negotiate
their differences. If that fails, and it likely will, a WTO panel will be convened to determine
what actions, if any, need to be taken. If the United States prevails, it would be allowed to
employ sanctions against China.

In a related development, US Reps. Duncan Hunter, R-Calif., and Tim Ryan, D-Ohio,
re-introduced their legislation that defines currency manipulation as an illegal trade subsidy, and
permits US workers and manufacturers to seek relief against imports from China and other countries
that regulate the value of their currencies. US textile manufacturers contend China’s currency
policies amount to as much as a 40-percent subsidy for its exports to the United States. In
introducing the legislation, Hunter said: “China is cheating on trade. Through the artificial
regulation of its currency, China is strengthening its manufacturing base and increasing America’s
trade deficit at the expense of our manufacturers. This is unacceptable and needs to be corrected
if American workers want to stay competitive.”

While recognizing there is a problem, Treasury Secretary Henry M. Paulson Jr. is opposed to
legislation and has said he hopes to negotiate better terms with China. At a recent hearing before
the Senate Banking Committee, however, senators expressed impatience and urged the administration
to take a much more aggressive stance.

February 6, 2007