The administration's new get-tough approach with China could involve filing trade charges against the Asian giant over auto parts and copyright piracy and branding the Chinese as currency manipulators. But the betting is that the harder line won't have much impact, at least right away, on the soaring U.S. trade deficit, which hit an all-time high of $726 billion last year.
It is that deficit that is getting a lot of attention in Washington, especially the one-fourth of the deficit that is accounted for by a single country — the $202 billion trade gap with China.
That figure prompted howls of protest in Congress. Lawmakers contended it showed President Bush is not doing enough to counter China's unfair trade practices, which they contend have contributed to the loss of nearly 3 million U.S. manufacturing jobs since mid-2000.
Lawmakers rushed to introduce more bills to slam China with tough economic sanctions.
Hoping to head that off, the administration last week unveiled its own get-tough strategy, a 29-page "top-to-bottom review" of trade relations between the two nations.
U.S. Trade Representative Rob Portman announced the creation of a new China enforcement task force in his office. He indicated that without progress soon in two areas of tension — high Chinese tariffs imposed on American auto parts and continued widespread copyright piracy of American products — the administration would probably file unfair trade cases against China before the World Trade Organization.
Treasury Secretary John Snow did his own tough talking last week, sending hints that the administration was considering designating China as a currency manipulator in a report it must make to Congress in April.
That designation would trigger talks between the two nations and could ultimately lead to trade sanctions if the United States won a WTO case on the issue. The administration for more than a year has resisted pressure to make such a designation, arguing that it could make more progress with quiet diplomacy to nudge China to stop depressing the value of its currency in relationship to the U.S. dollar.
American manufacturers contend China is blatantly manipulating its currency, keeping it undervalued by as much as 40 percent, to make Chinese goods cheaper for American consumers and U.S. products more expensive in China.
Sens. Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C., are sponsoring legislation that would impose across-the-board penalty tariffs of 27.5 percent on Chinese goods unless the Chinese stop the practice.
That measure is just one of a number of bills that would seek to punish China by imposing penalty tariffs on Chinese goods, higher tariffs that would be paid by American consumers.
"This would be a tax increase on low and middle-income Americans," said Dan Griswold, a trade expert at the Cato Institute, a Washington think tank. "They are the ones who are buying the shoes and clothing and toys coming from China."
But given that this is a congressional election year, analysts said the pressure is likely to keep building in Congress to retaliate unless China makes changes in its trade policies.
China will have several opportunities to do so in the near future, starting with a visit April 11 of top Chinese economic officials to Washington to discuss with their U.S. counterparts ways to relieve trade tensions.
And on April 24, Chinese President Hu Jintao will make his first official visit to Washington. Many observers think that could be a key time for the Chinese to offer some trade concessions, perhaps agreeing to revalue the Chinese currency by a larger amount than the small 2 percent change announced last summer.
"The Chinese would be smart to move," said Frank Vargo, vice president for international trade at the National Association of Manufacturers. "It would head off trade angst in this country and head off potentially damaging legislation."
But even if China does act, analysts caution that the changes being discussed would not do much to lower China's trade deficit with the United States, in large part because the gap is so wide. For every $1 in exports the United States sold China last year, China sold the United States $6 in goods.
David Wyss, chief economist at Standard & Poor's in New York, said China will likely offer to boost the yuan's value by another 2 percent, far below the 20 percent to 30 percent change that would be needed to make a serious dent in the deficit.
"China will do as little as possible," Wyss said, noting that Chinese leaders still see a critical need to promote export-led growth to create jobs for millions of Chinese.
Mark Zandi, chief economist at Moody's Economy.com, said the trade deficit with China could well hit $250 billion this year.
"I think there is a real danger that the trade deficit will be widening as we approach the November elections and at the same time the U.S. economy will be slowing," Zandi said. "The Chinese will get the blame and the threat of protectionist sentiment boiling over will be a real one."