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Home >> Opinion
UPDATED: 17:17, April 16, 2007
Is trade war between US and China looming? (1)
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Interview with Morgan Stanley Chief Economist Stephen S. Roach, by Yong Tang, People's Daily Washington-based correspondent.

The United States has formally lodged its WTO complaint against copyright piracy in China. According to sources, the US trade delegation in Geneva had handed the documents detailing the complaint to the World Trade Organization, activating the WTO's dispute settlement process. The US has also filed a case accusing China of restricting distribution of foreign music, films and books.

The WTO cases mark the latest in a series of trade disputes between the two economic giants. Last month, the Bush administration said it would impose tariffs on imports of glossy paper from China to combat Chinese government subsidies. And in February, the administration announced a WTO case charging China with providing illegal incentives to Chinese manufacturers to export their products.

Is a trade war between China and US looming? What is political significance of these tough gestures? How could the two countries work together to manage and even resolve trade disputes? Yong Tang, a Washington-based correspondent of People's Daily, conducted an exclusive interview with Dr. Stephen S. Roach, Morgan Stanley Chief Economist.

Yong Tang: US Trade Representative Susan Schwab said the new WTO cases should not be viewed as hostile actions against China, adding that they follow lengthy negotiations and represent the normal way for mature trading partners to resolve their differences. She also said there would be no trade war between the two countries. However, according to widespread media speculation, the move would very likely trigger a trade war between the US and China. Do you think this speculation is correct?

Roach: The words "trade war" are too strong at least at this point in time. The recent actions taken by the Bush Administration on certain paper products and Intellectual Property Rights are targeted actions that are not likely to derail the broadly-based bilateral US-China trade relationship. The bigger risk comes in the event of bipartisan congressional action on the currency issue �C with the possibility of more sweeping sanctions on Chinese exports to the US. If such a measure becomes law �C a distinct possibility in my view �C then a Chinese response in kind might pose a more serious challenge to the bilateral trade relationship.

Yong Tang: One expert on US-China trade said the Chinese government has taken several steps to protect intellectual property rights and he really doesn't know what more the Chinese governments can do. What's your personal opinion?

Roach: I have long warned senior Chinese leaders that action was coming on the IPR front �C and that this is a critical issue for knowledge-based segments of both the US and the Chinese economies. China has clearly made some important efforts in this regard, but these efforts have fallen short of what is required to defuse US concerns.

While enforcement of IPR is difficult, China has shown that it can be aggressive and forceful in dealing with this key problem. Interestingly enough, I recently saw a real-time example of what China can do on the IPR front when it puts its mind to the effort. Like most airports these days, Beijing International Airport has become something of an indoor shopping mall. Notwithstanding opportunities to make last-minute purchases of Chinese arts and crafts, the crowds were biggest at the Beijing 2008 kiosk, where travelers were fighting over newly minted souvenirs from the upcoming Olympics. What I found most interesting in these products is that they are all "officially licensed" - in many cases, complete with a numbered and holograph-tagged authentication certificate designed to foil counterfeiting.

China has long complained how difficult it is to enforce IPR protection in a nation where factories and distribution facilities can spring up overnight. Try finding official Beijing 2008 souvenirs in China's fabled open-air markets that contain knock-offs of a wide range of Western products. Let me assure you - you can't. When China puts itself to the enforcement task �C even in the IPR area �C it can accomplish almost anything.

Yong Tang: Do recent moves by the Bush Administration signal that the White House is getting tougher after six years of talk and conciliation with China?

Roach: On the surface, the Bush Administration has very little to show for its efforts. The bilateral trade deficit with China soared to a record -$232 billion in 2006, and by the end of last year accounted for fully 34% of America's overall multilateral imbalance. In the face of these numbers �C and in the context of politicians who have connected trade deficits with pressures on the American middle class �C patience with respect to talk and negotiations has worn thin in the White House, and the approach is now becoming more action-oriented.

Yong Tang: How do you think of the timing of the cases? Some analysts said the touch actions might be intended to defuse mounting political pressure on Capitol Hill to reverse a growing trade deficit with China. How do you think of this comment?

Roach: Congressional sentiment for legislative remedies to America's "China problem" has grown in early 2007.I have testified twice in front of the US Congress in the past two months, arguing that the US is wrong in blaming China for many of the structural problems associated with its unprecedented shortfall of domestic saving. No one in the Congress is listening to this argument. Instead, the Congress is now on a course to enact veto-proof, WTO-compliant legislation that would impose tough sanctions on China for having a "misaligned" currency.

I am sympathetic to the view that recent White House actions are aimed at pre-empting this congressional approach. I am not convinced that this approach will work, however �C the anti-China sentiment is too deep in the Congress to be altered by targeted actions on paper and IPR.

Yong Tang: The Bush administration had adopted an approach of dialogue and reconciliation to resolve trade disputes with China. What has caused the abrupt change of attitude? How domestic factors including Presidential Elections affect the trade relations with China?

Roach: Congress is the wildcard in the Bush Administration approach toward dealing with China. As the odds of congressional action intensify, the White House recognizes that it must do something to stop the anti-China train. Moreover, it is important to note that the current outbreak of China bashing has been triggered when the US unemployment rate is near a cycle low at 4.4%. With the US economy now softening, it is only a matter of time before the unemployment rate starts to rise �C a development that will intensify concerns over trade and China. I suspect this latter possibility also played a role in the Bush Administration's recent change of position on China trade policy.

Yong Tang: What is the political significance of the cases? Someone said a Democratic controlled Congress is more likely to embrace trade protectionism than a Republican controlled Congress. Do you think so?

Roach: This is not a partisan issue. Republicans and Democrats are united in their views toward China. A major trade and currency bill is likely to come out of the all-powerful Senate Finance Committee by midyear that will be co-sponsored by two Republicans (Senators Charles Grassley of Iowa and Lindsey Graham of South Carolina) as well as by two Democrats (Senators Max Baucus of Montana and Chuck Schumer of New York). Moreover, the bipartisan support could well be veto-proof - meaning it will be approved by more than two-thirds of the majority in both the House and the Senate, sufficient to override a presidential objection.

Yong Tang: The dispute between US and China over copyright piracy has been going on for more than 20 years. Some experts argue that the dispute will still be there for another 20 years. Do you think it's possible?

Roach: I think the protection of intellectual property is a very difficult issue to codify in the legal system of any economy. We are talking about human creativity, the branding of commercial applications of that creativity, and the patents, trademarks, and copyrights that presumably provide legal protection for unique talents. These can be fuzzy concepts in many countries, including the US. There are many I-Pods in America, for example, that are loaded up with illegally downloaded music. Who should be punished �C Apple, the web-based vendors, or the artists, who have turned over the rights to their products?

While I suspect this debate will be ongoing for a long time to come, it is critical for the protagonists in the US to see visible signs of progress from China -- something that has been glaringly absent in the current climate. Overt signs of piracy on the streets of China �C even though they don't amount to much in the broad scheme of cross-border trade flows -- certainly don't help matters.

Yong Tang: Frankly speaking what do you think of China's performance on copyright and even intellectual property right protection?

Roach: For reasons noted above, I think China can do much better in this area. A recent anti-piracy effort - the so-called "100-Day Campaign," which ran from July 15 to October 25, 2006 - was a high-profile example of China upping the ante in this area when it puts its mind to the task. Recently, China lowered the quantitative thresholds that trigger domestic IPR investigations. The USTR is not satisfied that this approach is sufficient to instill fear into counterfeiters and thereby trigger enforcement. If China feels differently, some high-profile prosecutions under these new thresholds would go a long way in demonstrating new legal traction on the IPR front.

Yong Tang: How will the trade dispute between US and China impact the bilateral political and diplomatic relations?

Roach: Right now, the impacts are confined mainly to rhetoric rather than a series of escalating actions. As long as trade disputes remain targeted �C i.e., focused on paper and IPR �C broader impacts on political relations are likely to be unaffected. If, however, the US Congress steps in and enacts a more broad-based series of WTO-compliant trade sanctions, then there is a risk that diplomatic and political relationships between our two nations could be damaged.

Yong Tang: In the coming month of May, the China-US Strategic Economic Dialogue (SED) will be held in Washington, D.C. Do you think the conference will ease the pain of the trade dispute?

Roach: I hope the next SED will be more successful than the first one, but I am worried that may not be the case. US actions on paper and IPR could backfire and make China less willing to make unilateral concessions at the upcoming May 22-23 meetings in Washington, DC. If that turns out to be the case, the failure of another high-level consultation to deliver measurable results on US-China trade could further inflame an already anti-China congress.

Yong Tang: The trade frictions have been getting momentum since the beginning of this year. Business Week once concluded that the bilateral trade relations between US and China would take a dramatic downturn in 2007 and the future would have to be a bumpy road. What is your opinion?

Roach: For reasons noted above, I concur with the conclusion that 2007 could well be a pivotal year on US-Sino trade relationships. Congress is dead set on taking explicit actions �C a conviction that can only deepen as the economy softens and the unemployment rate starts to rise. Moreover, given America's persistent shortfall of domestic saving �C and the likelihood that little will change the saving story in the years ahead �C a chronic bias toward ever-wider current-account and trade deficits will only intensify. China's comparative advantages in terms of costs, infrastructure, technology, and currency will only underscore the role of its trade sector as a major complement to America's saving shortfall.

Yong Tang: According to some media coverage, China is said to be the most ideal country with which US could launch a trade war. This is because China is becoming the major target of trade protectionism in the world as it turns out to be a prime destination for global industrial relocation. Do you agree with this notion?

Roach: The fact that China has the largest portion of the overall multi-lateral US trade deficit �C some 34% by year-end 2006 �C makes it a prime candidate to be singled out. As I have argued repeatedly, however, the US has trade deficits with many nations �C not just China �C because it suffers from an extraordinary shortfall of domestic saving. With America's net national saving rate averaging just 1% over the past three years, the US has no choice other than to import surplus saving from abroad in order to keep growing. And it must run massive current account and trade deficits to attract the capital.

China's large piece of America's external imbalance reflects its comparative advantage in producing what the US needs, as well as in funding America's capital inflow requirements. Unwilling to face the consequences of their own actions for contributing to this saving shortfall, US politicians have, unfortunately, turned China into a scapegoat.

Yong Tang: What could US and China do in order to manage and even resolve trade confrontations with each other?

Roach: As is the case in any dispute, both parties need to compromise in order to find the higher ground. Name-calling and belligerence will only heighten the hostilities. The US can alleviate the pressure by boosting its domestic saving �C thereby tempering America's seemingly chronic bias toward large trade deficits.

China can ease the problem by intensifying its efforts at financial sector reform �C thereby paving the way for an accelerated toward full currency convertibility. And, as noted above, China should also consider a more radical approach to the increasingly contentious issue of IPR enforcement. As China pushes its development challenge into the branded breakthroughs of an increasingly knowledge-based economy, IPR protection will be in its best interest as well. (END)


Stephen S. Roach is Managing Director and Chief Economist of Morgan Stanley, a leading global financial services firm. In this role, he oversees the Firm's highly-regarded team of economists located in New York, London, Frankfurt, Paris, Tokyo, Hong Kong, and Singapore.

Mr. Roach has been widely recognized as one of Wall Street's most influential economists. His published research has covered a broad range of topics, with recent emphasis on globalization, the emergence of China, productivity, and the capital market implications of global imbalances.

He is widely quoted in the financial press and other media, and his work has appeared in academic journals, books, congressional testimony, and on the op-ed pages of the world's leading newspapers. Before joining Morgan Stanley in 1982, Mr. Roach was Vice President for Economic Analysis for the Morgan Guaranty Trust Company in New York.

He also served on the research staff of the Federal Reserve Board in Washington, D.C. from 1972-79 where he supervised the preparation of the official Federal Reserve projections of the U.S. economy. Prior to that, he was a research fellow at the Brookings Institution in Washington, D.C.

Mr. Roach holds a Ph.D. in economics from New York University and a Bachelor's degree in economics from the University of Wisconsin.

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