In his first trip to Asia, US President Obama will be focused on three key economic issues: the undervalued Chinese yuan, the large trade imbalance between the US and China, and free trade agreements (FTAs) with Asia-Pacific countries. While the number of Asian FTAs has grown more than eightfold since 1980, the US continues to lag behind with only two FTAs in the region, and two pending agreements still unratified. See the following article from Money Morning for more on this.
When U.S. President Barack Obama this week makes his first visit to Asia as the nation’s chief executive, he will have no shortage of issues to address. However, there are three key subjects that he will pay particular attention to.
- China’s currency, the yuan, which Beijing keeps undervalued to boost exports.
- The large trade imbalance between China and the United States.
- And a pending free trade agreement (FTA) with South Korea.
Analysts believe President Obama will push to ratify a free trade deal with South Korea that was signed in 2007 but has failed to pass legislatures in both countries. Many also hope he will pursue other agreements like it.
“We are standing on the sidelines while Asian nations clinch new trade deals,” said Thomas Donohue, president and chief executive officer at the U.S. Chamber of Commerce. “We’ll pay the price if this continues. It’s time to see action from Washington.”
There are 168 free trade agreements currently in place in Asia, up from just 22 in 1980, according to the U.S. Trade Representative. Eighteen more have been completed but not yet implemented and 70 more are being negotiated. However, the United States has only two FTAs with Asia-Pacific countries: Singapore and Australia.
Former President George W. Bush pledged U.S. participation in the Trans-Pacific Strategic Economic Partnership Agreement, also known as “P4,” which includes Singapore, Chile, New Zealand and Brunei. In addition to its FTA with Singapore, the United States has an agreement with Chile, but would need deals with New Zealand and Brunei to become a full member of the pact.
So far, the White House has stalled on P4 negotiations as it reviews the U.S. trade agenda. U.S. Trade Representative Ron Kirk said the talks are “the most practical way to be engaged” with the region, but declined to say when or even if the United States would resume negotiations over the agreement.
When President Obama stops in Singapore this weekend, he will participate in the Annual Economic Cooperation summit, where he’ll be pressed on the United States’ trade stance. He’ll then face questions next week in Seoul over ratification of a 2007 FTA with South Korea.
Trade Representative Kirk said last week the Obama administration would not send the deal to Congress for a vote until Seoul allows more U.S. exports, including automobiles.
“Our market is open to Korean autos,” Kirk said in a speech to the U.S.-Korea Business Council. “All we are asking for is for our own auto companies to be able to compete on a level playing field in the Korean market.”
Ratification of the South Korea FTA would eliminate an 8% duty on U.S. auto imports. South Korea President Lee Myung-Bak said in June that he was committed to the deal, but declined to set a timeframe.
Trade Imbalance, Yuan Highlight Full Agenda for Obama in China
The most closely watched part of President Obama’s visit will be next week when he visits Shanghai and Beijing.
Speaking to Reuters, the president said he would raise with Chinese leaders the sensitive issue of the yuan, which hasn’t appreciated since July 2008 and is considered to be a large factor contributing to the U.S. trade deficit with China, which stood at $20.2 billion as of October.
“As we emerge from an emergency situation, a crisis situation, I believe China will be increasingly interested in finding a model that is sustainable over the long term,” President Obama said. “They have a huge amount of U.S. dollars that they are holding, so our success is important to them.”
Still, the president warned if currency and yuan issues don’t get resolved, he thinks “both economically and politically it would put enormous strains on the relationship.”
It’s unlikely that China’s will reverse its stance on the yuan, as exports are still suffering, having fallen 15.2% in September.
Beijing will hold its official line on the nation’s exchange-rate policy, Qin Gang, spokesman for China’s Ministry of Foreign Affairs told Dow Jones Newswire. The government will continue to reform its exchange-rate regime by raising rate flexibility while still keeping the yuan rate basically static.
Qin also reiterated the Red Dragon’s concerns about the United States, calling on the American government to maintain the medium- and long-term sustainability of its fiscal policy.
“This will be conducive to the stability of the U.S. dollar exchange rate and it will be conducive to China and the whole world,” Qin said.
Governments in trade surplus countries – such as China – must act to cut the disparity between saving and investment so they can raise demand in their own economies, U.S. Federal Reserve Chairman Ben Bernanke said last month at a conference of the Federal Reserve Bank of San Francisco.
“Admittedly, just as increasing private saving in the United States is challenging, promoting consumption in a high-saving country is not unnecessarily straightforward,” Bernanke said, suggesting that governments remove its citizens’ motive for saving by making pension systems stronger and increasing spending on health care and education.
President Obama will also attempt to cool tensions over the trade spat that has escalated between the two countries in the last few months.
In September President Obama imposed a 35% tariff – on top of the existing 4% duty – on Chinese tires coming into the United States. That order came mainly at the behest of the United Steelworkers union, which says 5,000 union jobs have been lost since 2004 because low-cost Chinese tires are flooding the market. From 2004 to 2008, the number of tire imports from China has tripled.
That was followed in October by a U.S. investigation into seamless steel pipe imports from China. The government agency will make a decision on preliminary anti-dumping duties in December and could impose new duties of almost 100% on imports of steel pipes from China as soon as February.
China responded with an “anti-dumping” probe into U.S. auto parts and chicken meat imports. Beijing is also investigating Detroit’s “Big Three” automakers to determine whether or not they are receiving U.S. government subsidies, or selling their products in China below market costs.
The United States isn’t seeking to engage in trade protectionism, U.S. State Department official Robert Hormats told Chinese university students yesterday (Tuesday), but acknowledged the trade tensions between the world’s No. 1 and No. 3 economies.
“Support for international trade in the United States is much less today than it was several years ago,” Hormats said, adding that especially with rising unemployment “there is skepticism about trade, and I have to say that to you candidly.”
Hormats stressed the United States would rather settle the dispute as opposed to taking them to the World Trade Organization (WTO).
“I know the tire case caused a great deal of tension in China,” Hormats said. “But I want to assure you that the U.S. is not a protectionist country.”
This article has been republished from Money Morning. You can also view this article at Money Morning, an investment news and analysis site.