China's preference: Chinese goods
United States and Europe cry foul on trade
WASHINGTON: Few American industries have had more success in selling goods to China than makers of medical devices like X-rays, pacemakers and patient monitors. Which is why a recent Chinese decree was so troubling.
The directive, issued in June, called for burdensome new safety inspections for foreign-made medical devices — but not for those made in China. The Bush administration is crying foul.
Even more worrisome to the administration is that the directive seems part of a recent pattern in which Chinese officials issue new regulations aimed at favoring Chinese industries over foreign competitors, despite efforts by Treasury Secretary Henry M. Paulson Jr. to ease economic tensions.
"There is clearly a growing economic nationalism in China that is leading to discrimination against foreign investors in pillar sectors of the economy," said Myron Brilliant, vice president for Asia at the United States Chamber of Commerce. "It's not only a threat to foreign investors but it also undermines China's transition to a market-based economy."
The Chinese actions and the administration's concerns threaten to roil the atmosphere when Paulson goes to China in early December with other cabinet members in another round of the "strategic economic dialogue" that began in September 2006. After seeking to defuse lingering trade disputes with China for the last 15 months, Paulson instead may have to tamp down fresh outbreaks.
"I can't tell you how many companies have come up to me — software, chemicals, autos — who say they're concerned about the trend," said a senior administration official, speaking anonymously to avoid antagonizing the Chinese. "We're very troubled about the long-term direction on some of these policies."
The American concerns are shared in Europe, which like the United States, is growing more upset about the trade deficit with China.
"What we're seeing are growing industrial interests lobbying state authorities in China and giving them preferential treatment," Peter Mandelson, the top trade envoy of the European Union, said in an interview. "The result is clear discrimination against foreign companies."
There has been little progress on Paulson's top priority of getting China to let the value of its currency rise, a step that would make imports from China more expensive and exports to China cheaper, and there are worries that the dialogue will increasingly be seen as useless.
"I wouldn't say it has hurt, but it has not helped very much," said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics. "Clearly the Chinese see the dialogue as a stalling mechanism to prevent Congress from putting up barriers to Chinese goods."
Paulson and his top aides say the dialogue has been beneficial by providing a framework in which to resolve disputes, even if it has yielded few short-term results. Even though exports to China are advancing at a rapid pace, they have done little to ease the alarms in Congress over the trade deficit with China, which this year is running well ahead of the $232 billion level of last year.
"The U.S.-China economic relationship has an enormous and growing amount of complexity," said David McCormick, under secretary of the Treasury for international affairs. "In some areas we are making progress. In other areas, we're not making enough progress. But the agenda remains in the interest of both countries."
McCormick said he did not think the actions by China in the last year were new but instead reflected many years of Chinese industrial policy favoring domestic industries in aerospace and shipbuilding.
But the medical device industry is one of several that seems to have been the target recently, administration officials say. The fear in Washington is that the growth of sales by big manufacturers like Medtronic, Johnson & Johnson, and Boston Scientific, which have doubled since 2002, could be set back.
"If this decision is not reversed," said Nancy Travis, a vice president of AdvaMed, the industry trade association, "it will result in boxes and boxes of medical devices piling up in Chinese ports, while potentially similar domestically produced medical devices are freely sold in the market."
Beyond the medical device sector were many other examples cited in a report in September by the Chamber of Commerce, drawing on the experience of businesses operating in China.
China, said the report, had become "increasingly sophisticated at developing and wielding industrial policies" in procurement, standards and antimonopoly laws to the disadvantage of foreign investors and importers. Among the examples cited are standards for wireless technology, mobile phones and mobile phone batteries that favor Chinese companies, as well as antimonopoly laws that exempt Chinese government enterprises.
In the last year, the Commerce Department and the Office of the United States Trade Representative have adopted tougher tactics, authorizing the expansion of duties on Chinese imports and taking China to court at the World Trade Organization. In response, China has denounced the American tactics and countersued at the WTO.
For a time, administration officials say, China shut down its talks with the trade office over Chinese piracy and counterfeiting of software, drugs and videos.
Administration officials also say that the recent furor over the safety of Chinese food, toys, toothpaste and other products has taken its toll in the economic relationship, and they hope that Paulson's visit in December coincides with some new agreements to improve safety standards in both countries.
The American medical device industry, according to some China experts, may be a victim of retaliation by some Chinese authorities because of complaints by the United States over unsafe and dangerous exports of Chinese products.
These experts say that China's consumer product safety authority has been discredited by the recent disclosures of tainted products. That appears to have opened the door for a separate customs bureaucracy, which issued the new regulation that worries the Bush administration, to grab power from a rival agency.
Of particular concern to Paulson have been efforts to open up China to access by American banks, insurance companies and other financial institutions. A former top executive at Goldman Sachs who had done many deals with China over the years, Paulson started the dialogue in part to accomplish this goal.
The Chinese lifted some limits on access by financial firms during the last round six months ago. But the United States continues to complain about caps on foreign investment of financial service companies and limits on foreign ownership of Chinese banks.
But even those skeptical of the results of Paulson's initiative say it has helped defuse some of the tension between the nations.
"If you look at the problems of the last few months, like the product safety issue, the strategic dialogue has served as a mechanism for dealing with them," said Jeffrey Bader, director of the China program at the Brookings Institution. "If the Chinese didn't have confidence in Paulson, we probably would have seen some uglier retaliations."