By  on June 23, 2009

BEIJING — China’s decision to direct stimulus spending toward domestic products first, after months of complaining about a U.S. policy of the same nature, could spell further trouble for trade relations between the two nations as concerns rise about protectionism amid the global economic downturn.

In a detailed document published earlier this month, the National Development and Reform Commission (the central government’s chief economic planning body) spelled out guidelines governing how China’s $587 billion in stimulus money should be spent. Among the pages was a controversial item directing local governments to spend first on domestic goods and services, saying too much has been spent on imports amid the stimulus spree. Much of China’s stimulus spending is expected to take place at the provincial and local government levels, at which the directive was aimed.

The “buy China” clause took observers by surprise, as Chinese leaders have railed against the U.S. since February for a provision in the American stimulus spending plan that encourages use of domestically made goods and services first.

“We won’t practice ‘buy China,’” Vice Commerce Minister Jiang Zengwei said in February. “We’ll treat domestic and foreign products equally as long as they are needed.”

That pledge has fallen by the wayside in what could be a signal of increasing tensions between the two trade giants.

The American Chamber of Commerce (AmCham) in China expressed concern about the delicate balance of trade ties, saying in a written statement that “protectionist policies and corresponding market distortions, in either Beijing or Washington, could prove extremely detrimental to the decades of bilateral progress that have contributed to growth and prosperity.”

“Chinese and U.S. companies and workers have much to gain from strong engagement, and much to lose from protectionism,” the business group added. “Furthermore, both countries have WTO commitments to keep in mind, which they made in the interest of open trade to promote robust growth.”

That growth in trade has fallen dramatically this year, as the recession has squeezed American pocketbooks and taken a toll on Chinese manufacturing. In May, China’s exports dropped by 24.6 percent from the same month a year earlier, continuing a trend that has also squeezed the country’s trade surplus to $13.39 billion — roughly 30 percent less than in May 2008. Also, last month, foreign direct investment in China declined by 17.8 percent from a year ago, with overall FDI down 20 percent in the first five months of this year.

As the trade relationship weakens, China’s concerns about its U.S. dollar investments continue — despite experts saying that, realistically, China has no better place to park its foreign currency reserves. Also heightening concerns, China has yet to sign on to the World Trade Organization’s Government Procurement, an agreement to promote fair competition and trade in government contracts. AmCham urged China to sign the pact, but as yet there is no indication it will.

Chinese economists were quick to defend the “buy China” provision, saying this country simply followed the example set by the U.S. Congress.

“I don’t know that there is an international rule that we should open our trade on this issue, but anyway, it was the United States that first broke the rule,” said Yuan Minggang, an economist with the Chinese Academy of Social Sciences.

Song Hong, director of an international finance institute at the same academy, said that, although the U.S. did fire the first shot in this spat, neither side is acting in a wholly responsible manner toward global economic recovery.

“It may not affect relations between China and the United States,” said Song. “But it will have a bad impact on the world’s economy, because right now cooperation is needed and lack of cooperation will harm chances for the global economic recovery.”

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