Heartland hurt has many asking: Is China worth it?

McClatchy NewspapersMarch 25, 2010 

SHARON, Pennsylvania — With a heavy heart, Wheatland Tube Co. President Bill Kerins surveys an empty lot where just a few years ago, a massive steel-pipe plant that employed hundreds of workers stood.

Needing to expand production, Wheatland purchased that plant in 2002. Within a few years, however, cheap imports of standard pipe from China surged from a meager 10 tons to more than 750,000 tons by 2007.

"It came in at prices we couldn't even consider competing with," Kerins said. "Finished product was brought in at less than our cost of raw materials."

Wheatland Tube sought relief through trade laws, but by the time the Bush administration acted, it was too late. The plant closed in 2007, and more than 200 jobs were lost.

The woes where western Pennsylvania meets northeast Ohio are the back story to the growing tension over China's trade policy and currency manipulation.

By April 15, the Treasury Department must declare whether it thinks that China manipulates its currency, the yuan, to give its own manufacturers a leg up on American competitors such as Wheatland Tube.

This fight over China's currency blossoms every spring in Washington, about the same time the cherry trees that ring the Tidal Basin do. This year, however, the U.S. economy's struggling to create jobs and reduce a high unemployment rate. That puts greater focus on what trade with China, now second only to Canada, means to U.S. jobs.

Official Washington is upset by China's intransigence on a number of issues, ranging from climate change and trade to Iran sanctions. Add into that volatile mix Google's recent decision to confront China over Internet censorship, and it seems clear that the status quo on China is giving way.

"I think there's a shift among global companies in how much pain they'll take in the Chinese market versus the actual benefits," said Alan Wolff, a former U.S. trade official and a leading Washington trade attorney.

Another source of anger in the U.S. business community is China's "indigenous innovation policy," where state-owned companies are encouraged to "Buy China." A survey by the American Chamber of Commerce in China, published March 21, found that 37 percent of its members reported a drop in sales even before the policy took effect. The Buy China policy further disadvantages U.S. companies operating there.

All of these factors add up to change the equation for U.S.-China relations, Wolff suggested at a recent National Foreign Trade Council forum.

"I think that the balance of this is shifting, and that means the politics of this is shifting as well," he said, noting that China's "Gold Rush" appeal to U.S. corporations is waning.

Even the most ardent free traders now say that it's time for a get-tough approach with China.

"The yuan is undervalued by at least 25 (percent) to 40 percent," said Fred Bergsten, head of the Peterson Institute for International Economics, the leading free-trade voice among policy research organizations.

Unless China revalues its currency, he said, U.S. exports — a job-creation priority for the Obama administration — will continue to suffer from China's "blatant protectionism." He estimated that China's artificial exchange rate is costing the U.S. in the range of 1.5 million jobs.

"You've got to put the exchange rate front and center" for the U.S. economic recovery, he told McClatchy. China's undervalued currency, he said, is "the equivalent of a subsidy on exports and a tariff on imports. It's preposterous."

However, Treasury Secretary Tim Geithner said Wednesday that the U.S. "can't force" China to change its currency policy, although he thinks it will do so voluntarily.

"I think it quite likely they move over time," Geithner said on CNN. "We can't force them to make that change. But it is very important that they let it start to appreciate."

For Wheatland Tube and other U.S. manufacturers, the currency flap is just one element of a larger problem that China poses.

"When you have the currency question, when you have a lot of market access difficulties, and you have really spotty enforcement of trade laws, it creates a horrible environment for you if you are competing in global manufacturing," said Scott Paul, the executive director of the Alliance for American Manufacturing.

A study for the alliance, conducted by the liberal Economic Policy Institute, concluded on March 23 that between 2001 and 2008, the U.S. lost some 2.4 million jobs to unfair trade from China.

Since Jan. 1, the U.S. International Trade Commission has taken eight actions regarding Chinese trade practices, including steel products. Adding insult to injury, however, some steel products subject to sanction are skirting penalties. They're shipped through a third company or country, often with false paperwork and hidden in containers that are inspected only randomly.

"They're definitely cheating, and we've seen it come in as books on a bill of lading, and it was (steel) tubing," said Richard Searing, whose Los Angeles-area company, Searing Industries, makes everything from barbecue burners to structural steel products. "China's cheating on everything . . . and now steel tubing is part of it."

Hanhen Shipping, in the southern China city of Shenzhen, calls itself a leading third-party logistics provider. Boasting "innovative thinking and young team," its Web site includes a diagram explaining how it moves product as if it were coming from another country "in order to protect the interests of traders and save tariff expenses."

The company promises to "switch documents reasonably" and offers to use Singapore or Dubai as camouflage. Hanhen notes that it issues country-of-origin documents from Malaysia, Vietnam, Indonesia and Bangladesh "in order to avoid tariff barriers."

For now, the Obama administration is following its predecessor in engaging China with dialogue rather than taking action.

"I am not excusing China's behavior," U.S. Trade Representative Ron Kirk told McClatchy. "We are extraordinarily frustrated. But on the other hand, China has only been a member of the WTO (World Trade Organization) for 10 years. They've been operating with the government philosophy, the state-owned enterprise system that they've had for dynasties.

"It is the best, but the most naive, of American values that we thought they would flip a switch and all that would end overnight. The reality is, it didn't."

China's now the third-largest market for U.S. exports behind Canada and Mexico, and is one of the most important destinations for U.S. agricultural products and a beacon for U.S. service providers. Restricting China trade isn't an option, Kirk suggested.

"Where do we think we will replace that $300 billion in exports if we unilaterally pull out of China?" he asked. "I think it's much more worth the effort to try to engage them, and try to get them to reform some of their manufacturing policies, not only to our benefit but to their benefit, which is the case President (Barack) Obama is making."

ON THE WEB

EPI report on jobs lost to China

Bergsten testimony on China

Hanhen's offer to skirt tariffs

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