By Tao Wenzhao

US senators Charles Schumer and Lindsey Graham, urged by President George W. Bush and under the lobbying of Treasury Secretary Henry Paulson, announced on September 28 that they had shelved their bill pushing for the imposition of 27.5 percent penalty tariffs on Chinese imports unless China moved to allow a greater appreciation of the renminbi, according to media reports. The US Congress would have voted on the act on that very day.

With the bill's withdrawal, the strained US-China trade relations have coasted around a snag.

The two senators initiated the bill because of the United States' ever-expanding trade deficit with China, which according to the US calculation, hit US$162 billion in 2004, for example.

After 2000, China replaced Japan as the country to which the United States owed the biggest reversed trade balance. Senators Schumer and Graham believed that China engaged in unfair competition on the world market, and the US market in particular, by keeping the renminbi's exchange rate artificially low.

Hence, they pushed for the penalty tariffs on Chinese commodities entering the US market unless China raised the renminbi's exchange rate by comparable margins.

The motive is obvious. But from what perspectives should we approach the matter?

For a start, the United States' reversed trade balance with China is determined by the economic structures of the two countries.

The United States, a highly consumptive economy, needs an incessant flow of consumer goods from various countries, which necessarily opens the US market wide for cheap and good Chinese goods.

By contrast, China enjoys a very high bank savings rate, which means that Chinese consumers buy relatively less.

On condition that the economic structures of the two countries remain unchanged, the unbalanced trade will be there, which is good for both nations in the opinion of this author.

In the repeated trade talks and negotiations launched since the 1990s, Chinese negotiators have time and again pointed out that labor-intensive industries are on the wane in the United States in the context of quickened globalization and internal US industrial realignment. In this scenario, hot sales of Chinese labor-intensive products are powered by market forces rather than artificial means.

Additionally, US companies rush to set up processing operations in China or make large procurements in the country, making full use of China's cheap labor force. This is how the US firms pay the lowest possible cost and gain the fattest possible profits. Exports by the foreign-funded processing operations make up a very big proportion of total Chinese exports to the United States - 48 percent in 2002, for example.

If all Asian economies are treated as a whole entity, no significant fluctuations are seen in the US trade imbalance with the area. Between 1990 and 2002, for instance, the bundled share of exports to the United States from the Republic of Korea and China's Taiwan Province declined from 27 percent to 17 percent while the portion from the Chinese mainland rose from 3 percent to 11 percent.

Finally, the United States imposes strict controls on the export to China of US high-tech products, involving nuclear reactors, satellites, integrated circuits and sophisticated machinery. This constitutes a double-bladed sword, doing no good to China and also harming the United States' own business interests.

Starting in 1994, the renminbi was pegged to the US dollar in terms of the exchange rate. As a result, the Chinese currency gained much in value, powered by the strong US dollar at the time.

In the late 1990s, when the Southeast Asian financial crisis broke out, China maintained the renminbi's value against heavy odds in a bid to stabilize the Asian economic situation as a whole. Its Asian neighbors, hit hard by the crisis, gave China credit for helping the region tide over the financial straits.

But winds began to blow in a different direction in 2002, when the US dollar began to devaluate.

Some US exporters, labor organizations and congressmen started pointing fingers at the pegging of the renminbi to the US dollar, charging that the fixed exchange rate between the Chinese currency and the greenback kept Chinese exports to the United States artificially cheap and US exports to China expensive, which largely undermined the competitiveness of US commodities. In their eyes, the renminbi's value was shoving up the United States' trade deficits with China and causing the evaporation of many working posts in American manufacturing sectors.

It was in this context that the Schumer-Graham bill was put forward in September 2003, and re-initiated in February 2005.

The Bush administration, however, adopts a different stance from that of the protectionist-minded senators.

On the one hand, top Bush government officials keep pressure on the Chinese Government for reforming the renminbi's exchange rate mechanism; but on the other hand, former US treasury secretary John Snow did not put China on the list of countries regarded as manipulating the exchange rates of their currencies.

Many American economists voice their opinions on the issue of the renminbi's revaluation. For example, Stephen Roach, chief economist of Morgan Stanley, remarked that China does not base competition on the devaluation of its currency and that revaluation in large margins would unlikely exercise significant influence on the price of Chinese exports.

Again, Roach said at the Davos World Economic Forum in January 2005 that the appreciation of the Chinese currency would not help significantly to bring down the US trade deficits.

Robert Mondale, the renowned economist and also a Nobel laureate, maintains that the renminbi's exchange rate should remain stable.

More and more Americans have come to realize the importance of China-America trade to the United States and become increasingly aware of the two countries' economic interdependence, though a protectionist mentality sticks at the US Congress.

This largely set the stage for the economic strategic dialogue between the United States and China, which was officially launched by US Treasury Secretary Paulson and Chinese Vice-Premier Wu Yi during the former's visit to China last month.

As this indicates, dialogue, rather than confrontation, is the best way to settle disputes at various levels and in different areas. Pressuring did not and will not achieve what dialogue does.

The author is a researcher with the Institute of American Studies under the Chinese Academy of Social Sciences.

(China Daily October 11, 2006)