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Economic Issues Cloud U.S.-China Relations

STEVE INSKEEP, host:

This is MORNING EDITION from NPR News. I'm Steve Inskeep.

RENEE MONTAGNE, host:

And I'm Renee Montagne.

Defense Secretary Donald Rumsfeld arrived in Beijing today. It's his first trip to China since he took over the Pentagon in 2001. In talks with senior Chinese officials, Rumsfeld is expected to highlight US concerns that the recent growth of China's military could affect the balance of power in Asia. Washington is also concerned about China's enormous trade surplus with the United States. Treasury Secretary John Snow has concluded a weeklong tour of China. There, he suggested that China should transform its economy from one that relies heavily on exports to one that's more consumer-driven. In the second part of a four-part series, NPR's Mike Shuster reports on the economic issues that cloud US relations with China.

MIKE SHUSTER reporting:

For more than 30 years, it's been the policy of the United States to bring China into the global economic system, and China has proven quite adept at it. Its economy has been growing at an accelerated pace for 20 years now. It's become a center for manufacturing unparalleled in Asia. Chinese exports in the US are everywhere, from shoes and toys to sporting goods and electronics.

Mr. JOHN TKACIK (The Heritage Foundation): The problem is that China hasn't followed the rules.

SHUSTER: John Tkacik is a former State Department official, now a China watcher at The Heritage Foundation in Washington. Tkacik argues that China is competing unfairly in the economic arena and is suffering very little for it.

Mr. TKACIK: We're looking for a China that's functioning in a rules-based economic and trade regime, but it doesn't follow the rules either in finance or in intellectual property. It doesn't follow the rules in guaranteeing investments.

SHUSTER: And most especially, say many analysts, China is manipulating its currency, which is pegged to the dollar, to benefit it and disadvantage others. That's what Treasury Secretary Snow and Alan Greenspan have been discussing with the Chinese over the past few days, even as a deadline looms for the US Treasury to make a judgment whether China is unfairly manipulating its currency. But that doesn't tell the whole story of the economic relationship between China and the US, says former deputy assistant secretary of State Randall Schriver.

Mr. RANDALL SCHRIVER (Former Deputy Assistant Secretary of State): We're not only interdependent, our economies, we're hyper-interdependent.

SHUSTER: In creating an enormous trade surplus with the United States, which is nearing $200 billion this year alone, China has amassed a huge reserve of dollars. What does it do with those dollars? It has to invest them in something, and one of its investments is in the US government, literally covering the enormous budget deficits run up by the Bush administration, notes Kurt Campbell, former deputy assistant secretary of Defense for Asia.

Mr. KURT CAMPBELL (Former Deputy Assistant Secretary of Defense For Asia): If you ask the question today, who is paying for the war in Iraq, I'm afraid one of the undeniable answers would be China.

SHUSTER: So, say some China watchers, the imbalances in the commercial and economic relationship with China are not entirely the fault of the Chinese. That's the view of David Lampton, a China analyst at the Nixon Center in Washington.

Mr. DAVID LAMPTON (Nixon Center): The Chinese are, by various measures, saving 35 to 45 percent of their Gross National Product, and basically the United States is saving close to zero, and that's why we're borrowing, in effect, for Treasury Notes and other debt instruments from Japan, South Korea and China, and I just don't believe it's a sound national strategy to borrow from competitive societies forever while saving and not investing in our own future.

SHUSTER: Nevertheless, members of Congress--most notably New York Democrat Charles Schumer and South Carolina Republican Lindsey Graham--have introduced legislation to punish China by raising trade tariffs if it does not take, in their eyes, sufficient steps to adjust its currency and trade policies. The Bush administration is uncomfortable with that kind of threat and is hoping that coaxing can put drastic solutions off. That was the warning that came from deputy secretary of State Robert Zoellick in a speech last month, widely seen as the administration's most comprehensive statement on relations with China.

Deputy Secretary ROBERT ZOELLICK (State Department): No other country, certainly not those of the European Union or Japan, would accept a hundred and sixty-two billion dollar bilateral trade deficit, contributing to a $665 billion current account deficit. China and others that sell to China cannot take its access to the US market for granted. As all of you know, protectionist pressures are growing.

SHUSTER: Some on the right, like The Heritage Foundation's John Tkacik, are not happy with what they see as the reluctance of the Bush administration to push China hard enough.

Mr. TKACIK: It's a mistake to hope that China will change without some very serious prodding.

SHUSTER: But Bates Gill of The Center for Strategic & International Studies in Washington cautions that actions that members of Congress are advocating may cause unforeseen economic dislocations inside and outside China.

Mr. BATES GILL (The Center for Strategic & International Studies): If anything, a radical and massive readjustment on the scale that some people are calling for by China would probably be disastrous for the global economy because it could well set China into a kind of economic tailspin, which wouldn't be good for anyone.

SHUSTER: Right now, though, it looks like the US and China are headed for a collision over trade, and that is certain to affect other areas of the US-China relationship, in the military sphere, competition for global energy resources and on the world's diplomatic stage. Mike Shuster, NPR News. Transcript provided by NPR, Copyright NPR.

Mike Shuster is an award-winning diplomatic correspondent and roving foreign correspondent for NPR News. He is based at NPR West, in Culver City, CA. When not traveling outside the U.S., Shuster covers issues of nuclear non-proliferation and weapons of mass destruction, terrorism, and the Pacific Rim.