Trade Talks (And What Is Not Said)

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Forbes reports that the US has seen some progress in trade talks designed to reduce China’s ever-growing trade surplus:

    “The United States hailed as a victory an agreement signed Thursday under which China will eliminate subsidies and tax rebates that boost its exports in certain sectors and stymie imports. For China, it is evidence of a quiet and growing recognition that it must play by the rules of the global trade regime.

    China reacted with indignation when the U.S. Trade Representative’s Office announced in February that it would challenge China at the WTO over state subsidies of exports of steel, wood and information technology products, among other goods, as well as “import substitution” subsidies that encouraged Chinese companies to buy domestic products instead of imports.

    Chinese officials and trade experts angrily claimed that the subsidies were allowable under WTO regulations and that Washington was attempting to retaliate against China’s rising trade surplus with the U.S., which this year is on pace to exceed $250 billion.

    Thursday’s agreement in Geneva, negotiated by U.S. Trade Representative Susan Schwab, commits China to eliminate the offending subsidies by Jan. 1.

    …Substantial business income tax breaks, which according to U.S. estimates benefited up to 60% of China’s exports, “have been repealed or will be repealed along with the implementation of a new Enterprise Income Tax Law,” Xinhua said.

    According to Xinhua, the exemption of Chinese operations set up by foreign investors from paying worker allowances to the government is “no longer operative.” Such companies are responsible for 58% of China’s exports.

    In one area, however, China was found to be innocent: giving refunds of value-added tax to companies when they purchased domestically made equipment, which is not barred by WTO.”

A small victory for the US perhaps, but many eyes remain on the value of the RMB – which Forbes calls “the largest Chinese subsidy to its exporters” (as well as other cases pending at the WTO). It may (or may not) therefore be a happy coincidence that the Chinese currency is expected this month to see its biggest monthly appreciation since the peg to the US dollar was lifted in 2005. Timing is everything, after all…

The currency issue will be addressed (again) during the latest round of talks under the US-China Strategic Economic Dialogue in Beijing this week (as it was at the recent EU-China summit). Also on the agenda, according to Forbes:

“…the US will be pressing for updates on China’s effort to increase securities licensing, expand scope of business activities for securities companies, and expand investment, all of which are reflected in past promises from China.

…Outside of financial services, US officials said this week that they expect general agreements that will facilitate information sharing on food, feed, drug and medical device safety. The safety of Chinese exports to the US has emerged as a top issue of the SED in light of this year’s wave of discoveries of unsafe toys and food

It is all good stuff. But will it make China change its policies? The Economist, in a review of the EU-China Summit, made an interesting contrast between the actions of France and Germany – and the reactions from China. France (whose president did not bring his human rights minister) was warmly welcomed, and gifted a US$17 billion order for Airbus planes, and another US$11.9 billion for two nuclear reactors. Germany meanwhile was shown a very cold shoulder on the back of a recent meeting by the chancellor, Angela Merkel, with the big D.L.

Sometimes what is not said at trade talks is (at least) as important as what is said. So much for a strategic dialogue!

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