Beijing's Trade Dominance China Makes an End Run Around the US

As more free-trade deals exclude America, Beijing could dominate a new Asian trade bloc. Washington is worried.

US President Barack Obama is in East Asia this week.

US President Barack Obama is in East Asia this week.

By Dexter Roberts and Pete Engardio

President Barack Obama makes his first state visit to East Asia on Nov. 13-19. He'll start off in Tokyo, attend a meeting of the Asia-Pacific Economic Cooperation forum in Singapore, travel to Shanghai and Beijing, then finish up in Seoul.

It's a cover-the-waterfront trip, but the focus is on China, America's key trading partner and rival. The Obama team will express its concern that Beijing aims to boost locally owned companies, from commercial aircraft makers to express delivery services, all at the expense of foreign competitors. Washington also wants China, which has more than $2 trillion in foreign reserves, to let the yuan appreciate against the dollar. Finally, Obama and top Cabinet officials will press Beijing to stoke consumer demand at home and rely less on exports to drive growth. Rebalancing the economies of China and other Asia nations "is perhaps the most important thing we can do to restore growth and jobs in the US," explains one senior White House official.

Beijing will likely respond by playing up the country's accomplishments: a huge stimulus package that pumped up spending at home and kept the world from sliding deeper into recession; signs of an increase in consumption; and a modest appreciation of the yuan over the last five years. China's ministers will also point out that Washington has its own work to do, especially in cutting the US budget deficit, bolstering the dollar, and devising regulations to prevent another blowout.

Diplomatic Dance

What happens in Beijing next week will undoubtedly be important to US -China trade relations. But trade developments throughout Asia will likely affect the American position in the region as much as, or more than, those meetings in Beijing. Even while it keeps up the dialogue with Washington, China is essentially doing an end run around the US in Asia by pursuing a bewildering variety of free-trade pacts with its neighbors. "What China is doing is very smart and logical," says Linda Menghetti, vice-president of the Emergency Committee for American Trade, a Washington group representing US multinationals. The White House, transfixed by problems at home and its own diplomatic dance with China, trails its rival in sewing up trade deals. The result could be a trade bloc dominated by the mainland.

China's trade diplomats have been exceptionally busy. Next year a deal to drop most duties on farm and manufactured goods goes into effect among China and 10 Southeast Asian nations. A landmark free-trade agreement between China and Taiwan is under discussion, while a financial-services pact with the island could be announced soon. Talks on liberalizing trade terms with Seoul and the Persian Gulf states are under way. China Premier Wen Jiabao just visited Egypt, where the Chinese announced a plan to give $5 billion in low-interest loans and export credits to Africa. In October, Vice-Premier Li Keqiang traveled Down Under to mend relations with commodity-rich Australia and discuss a new free-trade deal with New Zealand. With less success, Beijing has pushed for a regional currency that would weaken reliance on the dollar and increase the role of the yuan.

Why all the hustle? China's total trade volumes are expected to drop 20 percent this year largely because of the US recession. Beijing has to keep exports growing to keep workers employed, and it needs commodities to turn into finished goods. China also needs other nations as customers and suppliers-if not the US, then Korea, Japan, Australia, and others will do.

All-in-One Deals

The Obama visit, meanwhile, may yield some movement on a US pact with New Zealand and Chile. But important free-trade deals with Taiwan and Korea have been held up. One reason is the US approach to these agreements. In its trade talks, the US typically tries for universal, all-in-one deals that cover not only lower tariffs but also services, intellectual property rights, government procurement rules, and even labor and environmental codes. Initiatives by China and other Asian nations, in contrast, focus on simpler, narrower goals, such as a cut in tariffs or easing investment rules.

Chinese companies aren't complaining. After the Southeast Asian trade bloc decided to shed agricultural tariffs and ease manufacturing and property investment rules for Chinese companies, for example, Nanning-based Guangxi State Farms Group signed deals worth more than $620 million in the region. The US has been talking about joining the same trade group since 2002. The delay puts American companies at a disadvantage, says Karan Bhatia, a former US trade negotiator who now is General Electric's vice-president and senior counsel for international law.

Most manufactured goods made in Southeast Asia will now enter China duty-free. But goods shipped from the US will still face average duties of 9 percent. "That is a meaningful differential," Bhatia says. Much like Nafta, which prompted many global companies to produce in Mexico in order to export duty-free to America, many US manufacturers, will have to go to Southeast Asia to have better access to China. That would be bad for US exports.

'Goodies in Our Basket'

Obama is aiming to change the perception of American indifference. Trade issues will be on the agenda in Seoul and Tokyo as well as in Beijing, and Obama's team will include top economic officials Treasury Secretary Timothy Geithner, Trade Representative Ron Kirk, and Commerce Secretary Gary Locke, as well as Energy Secretary Steven Chu.

The message, says White House foreign policy spokesman Ben Rhodes, is that "the President is very committed to being competitive in this region." The Administration also knows that American executives are getting nervous. "What the companies are expressing is a strong interest in the US being engaged in (Asia)," says the senior White House official. "That is our position, not to sit on the sidelines."

Rather than bringing concrete proposals, though, Obama is likely to talk in generalities, says Ernest Bower, Southeast Asia director at Washington's Center for Strategic & International Studies. "We are coming without any goodies in our basket," he adds.

Diminishing Washington Influence

The change in thinking in Tokyo and Seoul illustrates Washington's problem. In Japan, new Prime Minister Yukio Hatoyama aims to forge a trade group with China and South Korea. Rising exports to China have helped Japan's economy survive a plunge in trade with America. "There's a consensus among policymakers that Japan can't only rely on relations with the US, because Washington's global influence has diminished," says Keio University economist Masaru Kaneko.

It's a similar story with Korea: In 2002 the US took 20 percent of Korean exports. In the first 10 months of 2009 the American share dropped to 10.5 percent, while China accounted for nearly 24 percent. No breakthroughs in US trade talks with Korea are expected. "I'm sure we will hear lip service about moving the Free Trade Agreement forward," says Lee Si Wook, a trade expert at the Korea Development Institute, a government think tank. "But actions will be lacking."

With Moon Ihlwan in Seoul, Frederik Balfour in Hong Kong, Kenji Hall in Tokyo, and Jane Sasseen and Steve LeVine in Washington

Roberts is BusinessWeek's Asia News Editor and China bureau chief. Engardio is an international senior writer for BusinessWeek.


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