US and China: A trade war brews

Within 20 years, the Chinese economy will probably be larger than that of the United States. Already China's geopolitical influence has grown along with its economic might.

Now come signs of a trade war.

What's happening is that the US is pressing China to revalue its currency by at least 10 percent, as a first step to a larger revaluation, and to clean up "unfair" trade practices. The Chinese government hasn't yet made such changes. And the US clamor doesn't help. Chinese leaders do not want to appear to be kowtowing to the US.

Neither side seems to grasp the dangers of such a deterioration in relations.

"The White House doesn't have a handle on it," says Harald Malmgren, an economic consultant in Washington, D.C. It's an "out-of-control issue."

The issue is important for Americans, and not just for those buying Chinese-made clothes at Wal-Mart. A major economic slowdown in China would hurt the world economy, slowing US economic growth and cutting jobs.

Moreover, the Chinese central bank is financing the massive US trade deficit by $1 billion a day. Without those loans, US interest rates would spike upward. Interest rates on mortgages would rise, hitting housing sales, and raising costs for millions of homeowners.

"This is a huge deal," says Clyde Prestowitz, president of the Economic Strategy Institute in Washington. "We are on life-support from China's central bank."

Both sides believe the other side has too much to lose to permit a trade fight, says Mr. Malmgren, who helped negotiate the Kennedy Round of world trade liberalization decades ago.

The US figures China needs access to American consumers for the host of manufactured goods it exports and will make concessions to safeguard that arrangement. On the other side, China sees the US wanting to continue to supply Chinese consumers with its farm products, and to protect its huge corporate investments already in China.

But Malmgren figures both Washington and Beijing assessments hinge on major miscalculations. Top Chinese officials have minimal knowledge of economic issues, he says. They aren't aware of the political dynamics in Washington. Moreover, they are preoccupied with keeping their capitalistic boom going at home and keeping a lid on domestic dissent.

But pressures are building in Congress to force the Bush administration to confront China in a tough way. Anti-China sentiment is rising among both Democratic and Republican legislators in Congress. But the US may not carry the economic clout it once had, experts say.

"The US will have to adjust to deal with another major power," says Mr. Prestowitz. "So far we are in a kind of denial."

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