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Beyond trade issues

The simmering trade dispute between the United States and China, if allowed to escalate, might hinder ongoing efforts at promoting global cooperation, so vitally needed for the world economy to come out of recession. The rising tensions could, for instance, cloud the outlook for the forthcoming G20 Pittsburgh summit meeting and affect the progress of the Doha development round of negotiations that have just resumed at Geneva. The genesis of the latest dispute lies in the U.S. decision to slap a 35 per cent duty on tyre imports from China on top of the countervailing duties levied on steel pipe imports. China has responded by taking the first steps towards creating tariff barriers to importing automobile products and chicken from the U.S. These items form a very small portion of the total trade between the two countries. During the first seven months of this year, Chinese tyre exports to the U.S. amounted to just $1.3 billion. The U.S. exported $800 million in automobile products and $376 million in chicken last year. To put these in a proper perspective, the U.S had a whopping trade deficit of $268 billion with China in 2008. For every dollar of goods the U.S. exports to China, it buys nearly $4.46 worth of Chinese goods.

It is clear that the trade dispute is but a manifestation of more complex issues that have caused friction between the two countries. The U.S. and some other countries having an unfavourable trade balance with China have accused it of holding down the value of its currency, thereby boosting its export competitiveness. However, successive attempts by the U.S. government to persuade China to let the yuan rise have met with limited success. China has accumulated more than $2 trillion of forex reserves, an overwhelmingly large part of which is invested in U.S government paper and other dollar denominated assets. There have been genuine fears in the U.S. that China might start selling those assets or at least stop buying them. Obviously, a permanent solution to the global imbalance lies in the U.S. saving more and China increasing its consumption. For now, there is a recognition that domestic pressures are behind the trade dispute. The U.S. President is seen acting on his campaign promise to save manufacturing jobs. A very large number of them have already been shifted to China. Given the interdependence of the two countries that goes well beyond trade and the overall size of their economies, it will be in the interest of the global economy as a whole that the disputes are resolved without any delay.

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