President Hu visits the U.S. - what you need to know

April 22, 2006

The most important economic concern is that the U.S. has a $202 billion trade deficit with China. The U.S. says it is because China’s products are underpriced due to an artificially low exchange rate. China says it is because the U.S. has a trade deficit with everyone, so it is American’s own policies that have caused it, not China’s.

Recently, the U.S. has taken several steps to get China to change its policies:

• In late March, U.S. officials said American companies have only $.5 billion of the $19 billion Chinese auto parts market. The U.S. and the EU lodged a complaint with the WTO saying China’s 28% tariff on foreign-made auto parts was unfair.
• Senators Graham and Shumer wanted to impose a trade sanction of 27%, unless China allows its currency to strengthen. They feel that the yuan is undervalued by 40%. After their recent trip to China, they agreed to wait until September before reintroducing the bill.
• There are 15 other bills or amendments in Congress that threaten tighter restrictions on Chinese trade.
• U.S. Secretary of Commerce Carlos Gutierrez visited China to encourage intellectual property rights protection on technology. There is a great deal of pirated software, and he said China does not try to stop it.

China would like the U.S. to relax sanctions on its exports in the high tech field. The U.S. is concerned that China will use this to transfer our tech expertise and gain comparative advantage that way.

What It Means:
This visit is meant by President Hu to get the U.S. to soften its harsh criticism of China’s trade policies and thwart potential sanctions. China focuses primarily on its economic growth, and negotiates trade policies with countries throughout the world, regardless of their political or religious beliefs, to achieve that goal. Although China is currently dependent on the U.S. market to sell their goods, they are expanding their trade with other markets, and increasing their domestic market. In the long run, China will continue to grow steadily, with or without the support of the U.S.

Action Steps:
China’s strength reduces the risk in investment in Far East funds. Traditionally, Far East funds have been seen by investment professionals as “emerging markets” funds, which were considered high risk due to volatility. However, there is a long-term shift in the balance of economic power towards China...and your portfolio can, and needs to, profit from that.

Additional Reading:

China: A WMW Special Report

Three Billion New Capitalists by Clyde Prestowitz