Friday, June 13, 2014

Sino-US trade ties sink over spying row

Despite the best efforts of politicians, trade relations between the United States and China continue to suffer over issues such as the artificial devaluation of yuan vis-a-vis the US dollar, tariff wars, dumping disputes at the World Trade Organization (WTO) and allegations of commercial espionage.

US economic experts blame China's non-compliance with the customary practices of the multilateral trade regime as a reason for much of the ongoing confrontation. Washington has time and20Book Fairagain raised concerns over China being a "rule-breaker" even a decade after its WTO accession.

Beijing has paid no heed to repeated US entreaties to reform its trade and currency policies and continues to disregard its obligations under the International Monetary Fund Articles of Agreement and WTO laws. Besides, the countries accuse each other of commercial espionage, thereby intensifying mistrust and suspicion.

A WTO ruling on May 23 on a trade dispute over tariffs on the imports of US-manufactured cars in China is a case in point. In 2012, the US had challenged the Chinese imposition of up to 21.5% duties on US-made luxury cars and sports vehicles. In response, Beijing accused the automakers in US of dumping and maintained that the imports of US origin luxury cars and their relatively cheaper selling prices in China hurts its domestic industry.

The latest ruling, however, once again upheld the US position in a WTO dispute against China's unjust and discriminatory tariff policies. In the earlier rulings of October 2012 and August 2013, the WTO's Dispute Settlement Body ruled in favor of Washington against Beijing.

In 2012, the US State Department had requested dispute settlement consultations over China's extensive subsidies to auto and auto-parts producers located in designated regions known as "export bases". The matter is pending at the WTO, but Washington claims that subsidies provide an unfair advantage to Chinese auto and auto-parts manufacturers' over their American competitors.

China's indigenous innovation policies, intellectual property rights enforcement, export license restrictions and export restraints on a number of raw materials where it enjoys certain advantages have also created considerable unease among the US industry experts.

Amid the ongoing tariff war, the exchange value of the yuan is another important issue - China and the US have been at odds over the currency for more than a decade now.

The issue of artificial devaluation of the yuan was the primary item of discussion during the recent visit of US Treasury Secretary Jacob Lew to China. Earlier this year, the value of the yuan dropped about 2.8% against the US dollar, which further widened the current account imbalances between the two giants.

US lawmakers upholding the concerns of American manufacturers have strongly warned Beijing from further devaluing the yuan. The lawmakers contend that China's exchange rate policy is largely state controlled and out of tune with free-market principles.

Adding to these tensions is the indictment of five People's Liberation Army personnel on May 19 by the US Department of Justice over charges of commercial espionage. Although the State Department has long accused China of various espionage activities into US commercial and military establishments, this instance marks the first official indictment by Washington of Chinese personnel over charges of commercial spying.

Washington has raised the issue of cyber-hacking during many of the high-level bilateral talks with China. The Pentagon's annual report to the US Congress for 2012 explicitly pinpoints China's computer network exploitation capability targeted at gathering intelligence from US diplomatic, economic, and defense industrial units. Beijing has categorically denied such allegations, calling them as "fictitious" and "unjust".

Infuriated at the indictment of its personnel, the Chinese foreign ministry vehemently dismissed the charges of espionage and sharply criticized US for its double standards on issues of spying. China also leveled counter-allegations of US sponsored surveillance activities into its own state owned enterprises.

Expressing further discontent, Beijing declared a suspension of cooperation with the US on a joint cyber-security task-force project. In other words, China views the recent indictment of the PLA officials as a deliberate provocation by the US to malign its international image and also to contain its economic rise.

Undoubtedly, these events accentuate a tumultuous phase in the US-China bilateral trade relations. Differences over major economic issues have almost unleashed a trade-war like situation between the two countries.

The recommendations offered by the US-China Track II Economic Dialogue, held in January this year, remain largely unfulfilled and fail to bolster trust between the two countries. The domestic politics of both the countries further precipitate negative attitudes on various economic issues thereby acting as a constraint to fuller cooperation or reaching an agreement on complex policy issues.

Overall, the US-China interactions, both economic and political, carry a strong undertone of competition and contest for supremacy in global affairs.

However, it is equally true that both countries have gained immensely from mutual cooperation in the past. The access to Chinese markets enabled US firms to stay globally competitive after the economic recession, while trading with the US helped China to improve its corporate governance and gradually realize the importance of multilateral trade norms in all aspects of economic activity and policy making.

Both countries thus stand to benefit from continuing to cooperate with each other. The upcoming fifth US-China Strategic Economic Dialogue, against this backdrop, offers a glimmer of hope for mutually agreed solutions on various trade and exchange rate policy related disputes.

It is imperative that political and business elites in both the countries comprehend the merits of economic cooperation and work together to dispel the notions of unwarranted competition. It would be pivotal that both the countries set a new course for the future and consolidate a cooperative partnership that benefits not only themselves but indeed the rest of the world.

Priyanka Pandit is a doctoral candidate at the Center for Chinese Studies at Jawaharlal Nehru University, New Delhi.


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