Possible U.S.-China trade war looms

October 07, 1992|By Robert Benjamin | Robert Benjamin,Beijing Bureau

BEIJING -- Sino-American goodwill flowed like the Chinese wine at a formal dinner last night opening the Ford Motor Co.'s first office here, an office that will lead a major thrust into China by the U.S. carmaker.

But behind the good spirits and heady expectations of profits there was a dark specter: the possibility of a nasty, mutually unprofitable trade war between the U.S. and China.

The trade war could begin as early as this weekend with the formal end of a yearlong U.S. trade investigation into Chinese market-access barriers -- raising disputes yet to be resolved by long-running trade talks.

The goal of the U.S. investigation is to force China to eliminate layers of internal quotas, bans, restrictions and unpublished rules that the U.S. believes unfairly prohibit American exporters from selling in China.

"It's a problem of transparency," said an official of the U.S. trade representative's office. "It's not clear what a U.S. exporter has to do to sell in China."

U.S. exporters find themselves spending tremendous time trying comply with Chinese rules only to discover that "there is still one rule they hadn't heard of," the official said.

These and the many other barriers help to account for America's rapidly rising trade deficit with China, which last year hit $12.8 billion and which could reach $19 billion this year.

China says it is moving to lessen its market restrictions, if only so that it eventually can rejoin the General Agreement on Tariffs and Trade (GATT). But it maintains that, as a developing nation, it cannot move as fast as the U.S. would dictate.

Most analysts expect negotiations now under way in Washington to resolve the dispute by this weekend or at least bring the two sides so close that the United States will not immediately enact trade sanctions.

A similar U.S. investigation of the widespread piracy in China of U.S. intellectual property rights, such as computer software and pharmaceutical manufacturing processes, ended last year with a last-minute agreement.

But as of the beginning of this week, major differences remained in the market-access talks.

If these are not resolved by midnight Saturday, the United States has threatened to put into effect punitive tariffs as high as 100 percent on $3.9 billion worth of Chinese imports.

Vowing not to be pushed around by the United States, China in turn has said it would retaliate by similarly raising tariffs on $4 billion worth of U.S. exports, including American autos and auto parts.

China also has threatened to cancel a recent agreement to buy $130 million worth of vehicles from the three major U.S. carmakers, including 3,000 Ford Tempos worth $32 million. And it has said it might stop buying wheat from the United States, purchases that China says amount to a fifth of all U.S. wheat exports.

The cost of a trade war would be high for both sides -- though China appears to have more to lose.

China is relying heavily on export industries to lead its rapid economic expansion and to build up its foreign-exchange reserves to service its foreign debt. The United States is its largest market, buying a quarter of all Chinese exports.

A trade war also would be devastating for Hong Kong. Sino-American trade accounts for about half the colony's total re-exports.

But punitive U.S. tariffs on Chinese imports would hit hard the growing number of export-oriented, American-financed joint ventures in China. For example, the Nike shoe company, which makes about 20 percent of its products here, reportedly plans to shift $150 million worth of production to other nations if needed.

Some large U.S. exporters, such as the Boeing aircraft company, also would be affected. In 1991, China imported more than $1 billion worth of airplanes and airplane parts -- 95 percent from the United States.

Consequent increases in the cost of many Chinese imports in the United States -- such goods as shoes, electrical goods and apparel -- would not help American consumers and shop owners as well. China claims it provides the United States with 45 percent of its shoes and 20 percent of its clothing.

In the long run, China is widely expected to accede to the U.S. demands in order to regain its membership in GATT, the world's largest multilateral trade pact, with 103 member nations.

China was one of the earliest signatories to GATT, but its membership was suspended in 1971, at the height of China's isolation. It has been seeking to rejoin the agreement since 1986, and that could happen as early as next year.

But for China, GATT membership would mean dramatically lowering its import tariffs, thereby opening some of its most heavily protected industries to foreign competition.

China's automakers, which lag at least 20 years behind their Western counterparts, are among Chinese industries expected

to fare most poorly in the face of this competition.

As a result, they have been seeking lately to expand cooperation with foreign firms, a move that bodes favorable, long-term prospects for American carmakers if U.S.-China relations remain intact.

Two U.S. auto companies already are producing vehicles in China, General Motors in the city of Shenyang and Chrysler in Beijing. Right now, Ford is talking publicly only about producing auto parts here.

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