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China takes liberties with its trade policies while the U.S. stares at its rising trade deficit.

By Coletta Kemper

When I visited China for the first time in March, I climbed the Great Wall, explored the Forbidden City, stood in Tiananmen Square and experienced a rich culture that has lasted thousands of years.

But that was ancient China. The new China is quite different. Beijing and Shanghai are as modern as any city in the world, and their young people more western than Americans. Starbucks is on every corner, and Tiffany’s does a brisk business.

Not all Chinese are benefiting from the economic miracle, but the numbers of those with disposable cash and a pent-up desire to spend it are growing. Skyscrapers rise in Beijing as fast as they can be built. Like whirling dervishes, people in the city hustle to make a living in their recently discovered capitalist style. It’s a city on the edge of the future. It’s what I imagine New York felt like at the dawn of the industrial age—still raw around the edges but raring to go.

Still, in many respects, China remains an enigma to the Western world, a riddle that intrigues and frightens us.

Public sentiment is divided on China. It’s great to buy cheap goods at Wal-Mart but at what cost to American jobs? Cheap imports make U.S. products less competitive, but the business community has its eye on the 1.3 billion potential customers. Historically, Chinese families save as much as a third of their income compared with single digits in the U.S. Just think about all that untapped credit card debt! It’s enough to make Mao weep.

The huge trade deficit with China doesn’t help answer the question of friend or foe. The deficit grew by $10 billion—from $47 billion in the last quarter of 2006 to $57 billion in the first quarter of 2007. Critics accuse China of manipulating the yuan to keep its exports cheap and U.S. products expensive.
 
Nor do the recent stories of poisoned pet food and toothpaste help China’s case. Unfortunately, with the 2008 presidential election season in full swing, the candidates are doing their best to fuel the fears of American voters.

The political friction was evident when Secretary of Treasury Henry Paulson met with China’s Vice Premier Wu Yi in May. The meeting was the second in the Strategic Economic Dialogue (SED), a process designed to resolve economic issues between the two countries and strengthen the relationship. What was intended to be a positive exchange deteriorated into a shouting match. The Chinese demanded to know why the U.S. imposed trade sanctions on the country instead of working through the SED process. The U.S. attacked China on piracy, government subsidies, product safety and currency manipulation. In the wings, Congress demanded that the Bush Administration hold China’s feet to the fire or it would impose more trade sanctions. A bipartisan group of 42 House members petitioned the U.S. Trade Representative to investigate China’s currency policies and file a case against it in the WTO.

With the political rhetoric at a fever pitch, it was tough to judge the benefits of the relationship.

As Vice Premier Wu noted, our economies are interdependent. Today we are each other’s second largest trading partners. Bilateral trade has increased 106 times over from 1979 to 2006, registering an annual growth rate of 18.9%.

The trade deficit with China will continue to be a political lightning rod if we don’t reduce it. But China is our fourth largest export market and growing. Sales of American goods and products in China exceeded $75 billion in 2004. That growth translates into jobs. Morgan Stanley estimates 4 million to 8 million American jobs are closely associated with trade with China.

What about those cheap products from Wal-Mart? Chinese exports have saved Americans $600 billion over the last decade and nearly $100 billion in 2004 alone. If the yuan becomes more expensive, so will China’s imports.

Our country is transitioning from a manufacturing to a services economy. The change comes with a cost of jobs, but it also creates new opportunities. Between 1996 and 2005, the U.S. lost 3 million manufacturing jobs but created 15 million service sector openings.

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