US and China: A trade war brews

In his new book, "Three Billion New Capitalists," he warns of developments that threaten to end 600 years of Western domination. They include the rise of Asia, unsustainable US trade deficits resulting in a buildup of dollar reserves in China and elsewhere, and the entrance of 2.5 billion Chinese and Indians into the world's job market.

The more immediate danger is a tit-for-tat trade fight. The US has already put quotas on imports of some Chinese textiles. China hints it might buy farm products such as soybeans from Brazil rather than the US.

In the US, Democrats charge the Bush administration with insensitivity to concerns of average working people by letting manufacturing jobs go to China.

As well, the emotional level on China is "running surprisingly high" among congressional Republicans, holds Malmgren. They worry about the safety of their seats in the 2006 election. So they take a strong stance against China and the "outsourcing" of work to China. They complain about Chinese piracy of US intellectual property, disputes with Taiwan, and inadequate Chinese pressure on North Korea to restrain its nuclear ambitions.

"China has not as much influence on North Korea as we think," cautions Prestowitz.

For a long time, the Bush administration has followed a policy of gentle, quiet efforts to persuade the Chinese to deal with currency and trade issues. But the US position has become "schizophrenic," according to Prestowitz. For instance, on June 4, Defense Secretary Donald Rumsfeld strongly criticized China for "its continuing large and expanding arms purchases."

Last Friday, China and the European Union reached a friendly agreement curtailing certain Chinese textile exports. Chinese negotiator Bo Xilai indicated China's preference for such a negotiated deal, rather than the US unilateral caps on China's textile exports. He reportedly cited a Chinese saying: "If you respect me by an inch, I'll respect you by a foot."

Both the Bush and Clinton administrations kept various issues with China - trade, currency policy, security, human rights, democracy, environment - on separate tracks. To Malmgren, that policy seems to have broken down. That's reflected in Congress where 67 Senators voted last month to call for a 27.5 percent tariff on all imports from China if it failed to alter its exchange rate substantially. That legislation is scheduled to come up again this summer, with a surprised administration trying to quell the uprising.

On the currency side, the US Treasury has sought to avoid designating China as a nation that manipulates its exchange rate to gain unfair competitive advantage in trade. If it did make such a designation, under existing legislation, it would be required by law to prepare sanctions or countermeasures.

The Treasury implied that China would have to revalue by the next semiannual currency report to Congress in October. China hasn't yet acted.

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