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WORLD

Big trade deficit still sore point

Piracy, currency, market access are U.S. concerns

By Geoff Hiscock, Asia Business Editor

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Agreement has been reached on China's textile and clothing exports to the United States.

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George W. Bush

(CNN) -- The United States expects to run a massive trade deficit with China this year of more than $200 billion, despite U.S. exports to China growing 22 percent to about $35 billion.

That gap, up from $162 billion last year and $124 billion in 2003, is why there is always a sharp edge to the trade debate between the two countries.

For the United States, some of the main issues are intellectual property rights, currency exchange rates, labor relations and market access.

Piracy -- of films, music, fashion, software and other creative content -- is one of the most highly charged issues for the American side, with California Governor Arnold Schwarzenegger the latest high-profile figure to visit China to press for a greater crackdown on fakes sold there.

On the currency front, the Bush administration keeps urging China to take further steps to revalue, arguing that the yuan exchange rate against the dollar is still too low, giving China a competitive advantage.

Adding to the domestic pressure on Bush are the complaints of specific U.S. industry sectors, such as textile and clothing, that cheap Chinese imports are destroying jobs. That has been alleviated, in part, by the recent bilateral agreement reached in Beijing on U.S. imports of Chinese textiles.

But protection of import-sensitive U.S. industries remains a vexed political issue.

For its part, China says its economy -- still surging ahead at a red-hot pace of 9 percent-plus this year -- will quadruple its 2000 size to exceed $4 trillion by 2020. This will, in the words of Chinese Premier Wen Jiabao, open up a "vast vista" for U.S. companies and investors looking at the China market.

The widening trap gap is a consequence of many factors, including the voracious appetite of price-sensitive U.S. consumers, who remain eager to buy a variety of textiles, sporting goods, toys and electronic items made in China.

Some of the factories that make those items in China are ventures involving U.S. companies and investors. And, according to an analysis of trade patterns by the U.S. president's Council of Economic Advisers, some of China's export gains come at the expense of other Asia Pacific exporters, as more factories relocate to China from Japan, South Korea, Taiwan and Southeast Asia.

While China is already the fifth largest trading partner for the United States, the income disparity means that China's 1.3 billion consumers are not yet able to buy enough in return. Instead, the top U.S. exports to China are big-ticket items such as commercial passenger aircraft, nuclear manufactures, electric machinery, medical and surgical instruments and plastic manufactures.

At a press conference in Washington this week, U.S. Trade Representative Rob Portman said it was not so much the size of the trade deficit with China that rankled, but what it represented.

"If the U.S. Congress and the American people believed that the current trade deficit with China were the result of fair and open market processes, I genuinely believe it would not get the attention it receives today," he said.

U.S. President George W. Bush, who is visiting Asia this week to attend the Asia Pacific Economic Cooperation forum in the South Korean city of Busan, is expected to raise bilateral trade ties when he meets Chinese leaders at APEC and during his follow-up visit to China at the weekend.

But the economic reality is that China's export engine is unlikely to slow too much in the near future, just as its own import appetite will continue to expand.

China's merchandise exports grew 35 percent last year to $593 billion, while its imports went up 36 percent to $561 billion. Commercial services exports were up 9 percent to $62 billion, while services imports grew 31 percent to about $72 billion.

In comparison, U.S. merchandise exports in 2004 grew 13 percent to $819 billion and imports rose 17 percent to $1525 billion. Services exports rose 11 percent to $318 billion, while imports rose 14 percent to $260 billion.

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