On 30 March, the US government introduced penalty tariffs on glossy paper from China. A week later, Washington filed cases against China to the World Trade Organisation (WTO) over intellectual property rights (CDs, DVDs etc). In May, a Chinese top delegation will arrive in Washington for the second US-China economic summit, hosted by US finance minister, Hank Paulson. Is the US government now changing to a new aggressive line on Chinese trade? How dependent are the two states upon each other and how important is China for global capitalism?
By Per-Ã…ke Westerlund, CWI Sweden

The National Association of Manufacturers, the biggest organisation for US companies, supported the recent moves by the White House. For years, China has been blamed for factory closures and financial deficits in the US. An anti-China lobby has developed among politicians, gaining in strength since the victory of the Democratic Party in the elections last year.

The US trade deficit with China last year was $232.5 billion – the largest trade deficit ever between two countries. This was just over a third of the total US trade deficit of 763.6 billion. In fact, much of the increase in Chinese exports is caused by Taiwanese, Japanese, South Korean and other South-East Asian companies moving production to China.

Another, for the US’ capitalists, shocking fact was that China’s merchandise exports in the second half of 2006 were bigger than the US’ exports. Only Germany is now a bigger exporter than China. And the trend continues. China’s trade surplus of $46 billion in the first quarter of this year is double the figure for the same period in 2006. China surpassed Canada in the first two months of this year as the largest exporter to the United States.

At the same time, China’s exports to the US and globally, its purchase of US treasury bonds (IOUs) and its huge imports of oil and raw materials has been the major engine of the world economy this decade. China is one of the most open economies globally, with drastically reduced tariffs, particularly since it joined the World Trade Organisation in 2001.

Tendency of the rate of profit to fall

China’s role in the world economy has allowed 1) a steady huge consumption in the US, despite negative savings, 2) the US economy to continue to grow despite its deficits, 3) huge profits for trans-national companies, most of all for oil companies. Already Karl Marx explained that the tendency of the rate of profit to fall – something inherent within capitalism – is countered by increased exploitation (longer working hours, increased tempo), lower wages and increased foreign trade. China’s re-emergence on the world scene has meant a strong downward pressure on prices and wages globally, and an increase in profits.

This is basically understood by capitalist strategists in the US. China’s strong response to the recent actions by Washington – saying it could “seriously damage” cooperation between the two countries – therefore also worries capitalist commentators. Organisations such as the National Association of Manufacturers do not want to seriously endanger this trade. Big business in the retail, pharmaceutical and software sectors were openly against the WTO filings. The possibility of protectionism –”the honey moon period may be nearing an end for the trading partners” (Financial Times, 11 April) – also sent the dollar down.

Trade confrontation?

The new tariffs on glossy paper are between 10 and 20 per cent. Imports of this kind of paper from China accounts for only 5 per cent market share in the US. The tariffs are, however, important for two reasons. The first is that China, previously regarded by the US as a “non-market economy”, is with this measure treated the same as other countries.

“The economy of China in 2007 is not the Soviet bloc of the mid-1980s when we formulated our policy of not applying anti-subsidy law to non-market economies … It would be divorced from reality if we said that there is an absence of market forces in China and that companies didn’t respond to subsidies,” said David Spooner, assistant secretary of commerce. The new US approach was also explained in this way: “China has moved from a faltering economy two decades ago to an export superpower with sophisticated marketing and manufacturing techniques” (New York Times, 31 March). China itself has pushed to be recognized as a market economy, and in March, Norway was the latest country acknowledging China as a “full market economy”.

The second important point is the implication for others industries. There is a strong lobby in the US and speculation that products in steel, textile, plastics and machinery could be next in line for raised tariffs.

”Pure politics”

Several capitalist analysts, however, still think it is a symbolic move by the White House. The Bush administration reckons that Beijing does not want confrontation. ”The experience so far is that when confronted in this way China has capitulated. The lesson is that the US should perhaps be more aggressive”, said well-known economist, Fred Bergsten. He and others point out that Beijing has already removed export rebates on steel.

“It is pure politics,” commented the chief economist of Global Insight, a company dealing with economic perspectives, to CNN. He believes Bush is acting tough to be able to renew the administration’s “fast track” authority on trade issues that expires on 1 July. If Bush is seen as passive against China, Congress might not renew his authority to sign trade deals.

The fact remain that many US companies rely heavily on China. US exports to China increased 32 per cent last year (to 55.2 billion dollar). One example is GE Transportation, based in Pennsylvania, that has sold 100 locomotives to China, with orders for 300 more. Another is General Motors, which predict sales of one million vehicles in China this year while its US market share has fallen dramatically. In 2006, China overtook Japan, becoming the second largest auto market globally (with 7.2 vehicles sold). The same year, for the first time, more cars were produced in China than in the US. China is described as having “cut-throat markets” and US companies are eager to be placed there, not just for production.

The spokesman of the US’ National Retail Federation was reported to be “perplexed” after Washington’s decisions. It’s a $5 trillion business, with China being the principal source of many of its imports, from toys to consumer electronics. Wal-Mart alone imports goods worth more than $20 billion from China. The NRF spokesman pointed out that Chinese cheap goods already are the subject of duties against dumping. Increased tariffs would therefore amount to “two bites at the apple”, he said. It is not yet clear what the WTO will conclude from these filings.

China in focus of world trade

Not only is world capitalism heavily dependent on China, the opposite is also true. The regime in Beijing relies on economic growth based on exports. China’s trade is equivalent to 65 per cent of its GDP. With the risk of protectionist measures from Washington, one strategy for the rulers in China is to limit its dependence on the US market. “Industries with comparative advantages [”abundant labour supply and lower labour costs”] can easily gain strength in the global market”, concluded an analysis in People’s Daily Online.

In the last few months alone, President Hu Jintao has made key visits to Russia, Japan and African countries in order to build “strategic partnerships”. The global drive is not only a search for oil and raw materials, but also to secure markets for Chinese exports. “China’s presence as a commercial force is rapidly being felt around the world,” Financial Times commented.

China’s most important trading partner at the moment is the European Union. In February this year, China’s exports to the EU were bigger than its exports to the US. The fastest export growth was in mechanical and electrical machinery. At the same time, the EU’s imports from China were bigger than its imports from the US.

“The US government is still trying to protect its own markets, unlike Europe, which is very free,” a Chinese textiles company manager told International Herald Tribune (17 April). His company is also rapidly increasing its exports to Russia, Eastern Europe and Brazil.

As a result, the proportion of China’s exports to the US have fallen from 31 per cent of total exports in year 2000 to less than 25 per cent, falling to 22.7 percent in February this year. (Financial Times, 23 March). In reality, however, this does not give the Chinese regime more room to manoeuvre. In absolute terms, Chinese exports increased by 27 per cent in 2006, so behind the fall in proportion is still a huge increase of exports to the US.

Piracy

The two cases filed with the WTO are a) protection of copyright for films against “piracy” and b) Hollywood demanding access to the Chinese film and media market.

Since Beijing has already promised to take action over piracy, their reaction against these cases was stronger than usual. ”The US has ignored the Chinese government’s immense efforts and great achievements in strengthening intellectual property rights protection and tightening enforcement of its copyright laws”, said Tian Lipu, commissioner at the Intellectual Property Office.

At the root of this issue, however, is the nature of today’s Chinese economy. As Financial Times correspondent, Richard McGregor summarised it: “…the fundamental driver of piracy, […] is the peculiarly Chinese combination of authoritarian political controls with a free-for-all market economy”. In order words, the Chinese regime is encouraging a “Klondike mood”, in which “entrepreneurs” should attempt to dig gold anywhere. At the same time, the dictatorship keeps its strong grip on politics and acts to crush any independent movements.

For film and others commercial cultural business the result is that when the state censorship authorities are ready to release a film, it’s already up and running on DVDs and cinemas. Beijing is caught between its efforts to not upset the US and the West too much, and the pressure from its huge “piracy industry”.

Foreign exchange reserve

This year has seen an ever-faster growth of China’s foreign exchange reserve. The increase was on incredible $1 million per minute in the first three months of 2007. China’s total reserves, passing one trillion dollars last year, are now over 1.2 trillion. China is the second largest holder of US treasury securities (IOUs) after Japan.

Behind this rise, alongside increased trade, are increased foreign direct investments in China. FDI rose 11.6 percent in the first three months of this year to US$15.9 billion. Another factor behind the increase is the repatriation of capital from Initial Public Offerings (IPOs, launching a company on stock exchanges) of Chinese companies. Chinese IPO’s last year raised $42 billion, of which the Industrial & Construction Bank of China brought in 29.9 billion. Chinese capital prefers to stay in the country, to gamble on the construction boom, the stock market bubble and expectations that the currency will continue to rise against the dollar.

This surplus of capital is not going anyway near areas where it is really needed – healthcare, education or the environment. Instead it’s causing overinvestment, overproduction, speculation and bubbles. To be able to use the trade and finance links with the US fully, Beijing’s monetary policy has de facto followed Washington’s for over a decade. Several attempts to raise interest rates and new rules for bank deposits have not been able to stop the overheating. China’s economy will grow 11.2 per cent in 2007, according to a prognosis from the investment bank Goldman Sachs.

Pressure from the US for a revaluation of the Chinese currency, the renminbi, is very strong. Those arguing for a revaluation say it would stop unfair Chinese competition. In July 2005, the renminbi’s value was increased by 2.1 per cent against the dollar, to avoid drastic new laws imposing tariffs from the US Congress. Since then it has increased another 5 per cent. But the consequences of a revaluation of 20-40 per cent could become the opposite of what the anti-China lobby believes. It could well be the start of a sharp fall in the dollar, tipping the US into recession with global consequences. Chinese industry would be heavily affected, with the risk of millions of job losses.

Beijing’s conclusion from the huge foreign exchange reserves is that it must has to buy more financial assets abroad. New institutions are being created to oversee foreign investments from China, i.e. acquisition of companies and natural resources, as well as joint ventures in other countries.

Strategic Economic Dialogue

The first US-China bilateral economic summit at the end of 2006 was a three-day meeting in Beijing, involving US finance minister, Hank Paulson, Federal Reserve Board chair, Ben Bernanke and trade secretary, Susan Schwab. Alongside the summit, there are hundreds of sub-committees to deal with specific questions. At the December summit, the US delegation had three themes: China should a) open its bank/financial services market, b) reduce the trade deficit with the US (i.e. revalue the renminbi) and c) generally “keep the momentum of reform”. Schwab said that China should no longer follow an “Asian model” but go for general liberalisation (read: the US model). Basically the same was raised with South Korea in the negotiations that ended in a bilateral free trade agreement with Washington last month.

In December, the Chinese ministers promised to keep up the “reforms” and open the country further for foreign capital. But particularly Vice Premier Wu Yi referred to China’s violent history and underlined that it’s still a developing country. Beijing fears social revolt as a result of the widening gap between rich and poor – 700 million Chinese live on on less than 2 dollars a day and the living standard of the poorest ten per cent has even fallen in absolute terms. The dictatorship needs 8-10 per cent yearly economic growth, alongside its nationalist propaganda to stay in power. It can’t risk confrontation with the US, but can’t be seen as adapting to the US too much either, especially not if the result is closed factories. This balancing act between the ruling classes in the US and China, is not possible to uphold indefinitely. In the short term, however, both governments, despite their rhetoric, will do everything to avoid a trade war. But in the long run, the issue will not decided by rational logic, since conflicting interests are at stake.

The solution for workers in the US and China is neither protectionism nor “free trade”. Advocates of either are only debating which means to use for increasing their profits. The super-exploitation of workers and loss of jobs is rooted in the global profit system of capitalism. The alternative is a socialist, democratically planned economy, which can only be achieved by the struggle of the working class globally.