Record China Deficit Clouds U.S. Talks

Deficit hits $24.4 billion.

U.S. economic chiefs headed Dec.12 to high-profile talks in Beijing bearing the unwanted gift of a record trade deficit and under pressure to come back with more than just words.

New U.S. government data showed the country's trade deficit with China grew 6.1% to a record $24.4 billion in October, representing a whopping 41% of the total U.S. gap of $58.9 billion.

In the run-up to year-end holidays, U.S. retailers and consumers splurged on cheap Chinese goods to drive imports from the Asian powerhouse up to an all-time high of $29.3 billion. That accentuated a headache for the delegation of U.S. economic captains led by Treasury Secretary Henry Paulson, who left Dec. 12 to launch a new strategic dialogue in Beijing on Dec. 14 and Dec. 15.

With the Democrats set to retake control of Congress next month, many want the U.S. administration to get tough over allegations that China distorts its currency rate among other measures to bolster its exports.

Joel Naroff at Naroff Economic Advisors noted that Paulson, Federal Reserve chairman Ben Bernanke and other top officials were in the unenviable position of "toting an ever-widening deficit with them" to Beijing. "It looks as if our deficit with China will be about $240 billion this year, about a 15% increase (on 2005)," he said. "Needless to say, that will create some real pressures to get things done, especially with a not-so-friendly Democratic Congress about to exert its unhappiness."

On Dec. 11, exactly five years after China joined the World Trade Organization, U.S. Trade Representative Susan Schwab issued a hard-hitting annual report that accused China of flouting its market-opening promises. The USTR report to Congress stressed that China appears to be going backwards in some pivotal areas, including in "rampant" piracy of U.S. goods and favoritism towards Chinese industries. Washington prefers dialogue such as this week's strategic talks to resolve trade frictions with Beijing, the USTR report said. But when these efforts fail, the administration "will not hesitate to use the range of tools available, including WTO dispute settlement procedures and the application of U.S. trade laws" to bring China to heel, Schwab warned. Paulson cautioned last week that "the rest of the world is not going to tolerate China taking too long to make the sorts of adjustments in the currency that need to be made."

But with China insisting that the yuan's exchange rate is a "sovereign issue," the U.S. Business and Industry Council fears that Paulson and his team will hear the "same old song" in Beijing. "A fundamental change in U.S. trade policies is urgently needed, including the strongest response to Chinese transgressions," USBIC president Kevin Kearns said.

Copyright Agence France-Presse, 2006

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