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Why Obama makes little headway balancing US-China trade

China’s growing economic clout and its role as lender to the US means Obama has less leverage to press for changes to US-China trade.

By Staff writer / November 17, 2009

President Barack Obama and Chinese President Hu Jintao (right) reach out to shake hands after a press conference at the Great Hall of the People in Beijing, China, Tuesday.

Ng Han Guan/AP

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President Obama stood side by side with China’s President Hu Jintao Tuesday, but they weren't seeing eye to eye on economics any more than on Afghanistan or Tibet.

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Both the US and Chinese economies felt the squeeze of recession. Yet neither of the world's most powerful economies seems to have changed their ways.

The US is still running a huge trade deficit and borrowing lots of money from China.

China is still racing to expand its high-tech manufacturing exports, and as part of its strategy is fixing its currency at what many economists believe is an artificially low level. A cheap yuan can help to make Chinese products more attractive on world markets.

One sign of the times: America's industrial capacity – the nation's ability to produce goods – has been falling for 10 straight months, says Charles McMillion, chief economist at MBG Information Services in Washington. China isn't the only reason for the trend. But he notes that from 1948 to 2001, American industrial capacity never had a single month of decline – even though factory output would slump during recessions. That string was broken in 2002, the year after China won membership in the World Trade Organization.

Now, as China makes more of what Americans buy, Mr. McMillion says there's a real chance that US businesses will continue to close factories – cutting US jobs even as the economy recovers.

The numbers he cites were reported by the Federal Reserve Tuesday, even as Mr. Obama was wrapping up his first presidential visit in Beijing.

"There seems to be no pushback [by Obama] against the vast, powerful array of non [free] market policies in China," McMillion says.

One reason for that: pushing back isn't easy in this important and complex relationship, even though Obama promised a tougher stance on China during his presidential campaign.

Economists cite several reasons:

• A get-tough approach to trade relations would backfire, many say. US consumers could face higher-priced goods if Obama raised trade barriers. The label "protectionist," which President Hu tried to tag on the US Tuesday, might stick – and be followed by new trade barriers in other nations.

• China's rising manufacturing muscle has lots of momentum – which continues despite the recession.

• Even if China adjusts its currency upward, as some forecasters expect will occur over time, history suggests that won't necessarily put US manufacturers on easy street.

• The China-US relationship is increasingly a banker-borrower one, with Beijing a big buyer of US Treasury debt. As the Obama administration works to reassure China and other lenders that it has a plan for fiscal solvency, it has less leverage on other matters such as trade.

Washington still has some leverage in its policy dealings with Beijing. Just as US-based companies want access to China's market, China wants access to America's big consumer market – and especially to US technology.

Many economists say it's important for these two giant nations to "rebalance" their economic ties – with Americans living within their means and China relying more on internal consumption to fuel its growth.

A key question is whether that will happen on its own in the wake of the "great recession." Consumers in the US certainly can't spend like they did before, and Chinese factories have felt the effects. But America's trade deficit rose in September, with the nation importing $36.5 billion more than it exported. The trade gap with China equaled two-thirds of that total.

McMillion, who closely tracks US-China ties, estimates that the US has lost 1 million jobs to China since 2001.

Know-how is also flowing outward, as Chinese businesses seek partnerships that include the transfer of technology. General Motors has recently set up a big research and development operation in China. And just as Obama was arriving, General Electric announced a joint venture with China's AVIC Systems to develop avionics for commercial aircraft.

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