By  on September 22, 2009

The trade relationship between the U.S. and China, which has often been complicated by political and cultural clashes, has entered a complex and contentious new stage.

With tensions escalating over President Obama’s decision to impose tariffs on Chinese tire imports at the behest of a powerful labor group, the two countries have ended a relatively stable period of trade relations.

The U.S. and China share one of the largest commercial relationships in the world — China is the second largest trading partner of the U.S. behind Canada — while being on opposite ends of the political spectrum: leader of the free world versus most populated country long run by Communist dictatorship.

But the trade balance between the two countries has been lopsided for years, with the U.S. posting record deficits, often prompting calls at home for protectionist actions against China. The U.S. goods trade deficit with China was $268 billion in 2008, according to the U.S. Commerce Department. Total U.S. exports reached $69.7 billion last year, while U.S. imports from China hit $337.8 billion.

The U.S.-Sino trade relationship also presents significant exposure for the fashion industry, which imported $37.93 billion of apparel and textiles from China in 2008. The U.S. apparel and textile deficit with China, which hit $37 billion in 2008, has impacted U.S. trade policy on many levels.

The two most contentious trade actions regarding Chinese imports for apparel and textile executives were the 10-year phaseout of quotas between 1995 and 2005 agreed to in the Uruguay Round of global trade talks and the reimposition of quotas by the Bush administration in a three-year bilateral textile quota agreement, limiting high-volume Chinese apparel and textile imports from 2005 through 2008.

The concern in the industry is that the new tensions with China and an anticipated China safeguard case by the U.S. textile industry will further strain the relationship and jeopardize trade flows.

“You have to ask whether [the U.S.] is provoking China to be more aggressive in their pursuit of remedies themselves,” said Stephen Lamar, executive vice president of the American Apparel & Footwear Association. “This is a mature relationship and mature relationships can handle complex things, but they can also spin out of control.”

The Chinese government has filed a complaint with the World Trade Organization in response to the U.S. safeguard action against imported tires, in addition to launching antidumping and antisubsidy investigations against U.S. exports of chicken and auto parts.

Obama and Chinese President Hu Jintao, slated to meet at the G-20 summit in Pittsburgh this week, are facing a set of serious and complex trade issues. The U.S. has several pending WTO cases against China, ranging from intellectual property enforcement to illegal subsidies, as well as pending dumping and subsidies cases brought by U.S. industry against Chinese imports filed with federal agencies that are expected to move this year.

“If you look strategically, economically and politically, there is a lot of cooperation between the U.S. and China,” said Mickey Kantor, U.S. Trade Representative from 1993 to 1996 under President Clinton and now a partner at the Washington law firm Mayer Brown. “But there will always be problems. We have problems with Europe and Canada, therefore we’re going to have problems with China, especially as the relationship develops and thickens. That is only natural. We have more trade disputes with Canada than any other nation in the world because they are our biggest trading partner. That is going to happen.”

A spokeswoman for current USTR Ron Kirk said, “Working through issues like this (the China tire safeguard case), as we have with the [European Union] and other major trading partners is a normal component of a robust economic relationship. Enforcement of our trade agreements is not protectionism, but rather a key to maintain the fair and open trading system that is necessary for global and economic growth and recovery.”

While Kantor said the punitive action in the tires case would not have a long-term impact, some said Obama’s action ratcheted up the tension and might not bode well for the relationship.

“It’s important for political, economic and commercial reasons for each government to enforce its rights, as well as meet its obligations under trade agreements,” said Susan Schwab, who was USTR under President George W. Bush from 2006 through 2008 and is now a professor at the School of Public Policy at the University of Maryland. “That lends credibility to the system and that is crucial going forward. However, I think the concern that most of us have is less that there is going to be a huge, knock-down, drag-out trade war and more that there is a growing list of insidious business-distorting actions on the part of governments, including the Chinese government and ours, that undermines both the normal flow of commerce based on comparative advantage and the attitude about trade and each other.”

Schwab said it is too early to tell how the China tire decision will impact the future U.S.-Sino relationship, but warned if it is the first of many, “it could have a very significant negative impact.”

Xing Yue, an international studies professor at Tsinghua University in Beijing, said Obama’s decision strikes a political chord with a country that had dealt for centuries with a perception of being looked down upon by Western nations. In other words, some analysts said, China might have a bit of a chip on its shoulder when it comes to international relations.

“Whether this is a sign of downturn of the trade relationship depends on how long this conflict continues,” said Xing. “Both sides are fully aware that it’s very unwise to make it worse. That would be a lose-lose situation.”

The China safeguard tire case underscores the difficulties the U.S. has in trying to foster a stronger alliance with the Chinese on foreign policy issues while simultaneously punishing the country on trade. The White House needs an ally in China to resolve disputes with North Korea and Iran over nuclear weapons programs, address climate change and global warming, and tackle global economic challenges.

The two countries directly address broader foreign policy issues, as well as trade and currency issues, within two sets of discussions: the semiannual U.S.-China Strategic & Economic Dialogue led by Treasury Secretary Timothy Geithner and Secretary of State Hillary Rodham Clinton, and the annual Joint Commission on Commerce & Trade headed by the U.S. Commerce Secretary and USTR and a Chinese vice premier.

China’s monetary policy adds another layer of complexity to the trade relationship. Critics argue that China undervalues its currency, which puts U.S. products and companies at a competitive disadvantage against artificially cheaper Chinese imports, often prompting calls by U.S. lawmakers and domestic industry groups for punitive trade action.

The Treasury Department declined to challenge China’s currency policies in a report in April when it ruled against labeling China a currency manipulator, despite statements to the contrary by Geithner claiming China was manipulating its currency.

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