Opening Remarks June 23, 2010, 11:01PM EST

Five Options for Tackling Trade With China

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2. Declare an Emergency: Ian Fletcher, an adjunct fellow of the 77-year-old U.S. Business & Industry Council and author of the bluntly named Free Trade Doesn't Work, says President Barack Obama should make like President Richard Nixon circa 1971 and declare a balance-of-payments crisis, meaning that the U.S. can't cover the cost of its imports. That, he says, would entitle Washington to impose tariffs on imports from all countries. "People have to be willing to get some serious blood on the carpet," says Fletcher. Although less discriminatory than China-only tariffs, Fletcher's solution would undermine America's claim to leadership of the global trading system.

3. Use the WTO: China reformed its communist economy to qualify for the World Trade Organization, but has backslid since gaining membership in 2001. The "indigenous innovation" drive that accelerated last year—an attempt to become technologically self-sufficient by learning from the West—is the latest manifestation of a Chinese tendency that goes back to the Self-Strengthening Movement of the Qing Dynasty in the late 19th century. The U.S. could use the WTO more aggressively to stop China from favoring domestic products over imports, says Robert Cassidy, who was an assistant U.S. trade representative responsible for China under President Bill Clinton. China takes WTO compliance seriously. The problem: China has learned to play the WTO game. "China knows better today how to pursue its industrial policies with tools that won't trigger a WTO case," says Ted Dean, vice-chairman of the American Chamber of Commerce in China.

4. Talk, Talk, Talk: The more points of contact there are between the U.S. and China, the better the chances of progress. A program known as the U.S.-China Strategic & Economic Dialogue, begun under President George W. Bush, widened the conversation between the U.S. and China beyond trade issues to include currency and economic concerns. The periodic U.S.-China Investment Forum, also begun under Bush, brings Americans into contact with the central planners of China's National Development & Reform Commission. Chinese importers, consumers, and even techies often have interests that align with those of the U.S.

Opposition last year from Chinese Internet enthusiasts forced the government to back down from a plan to put intrusive filters on all personal computers sold in the country. "We need to be able to find ways to work with constituencies within China that agree with us to attack those that don't," says Charles Freeman, an assistant U.S. trade representative in the Bush Administration who is now with the Center for Strategic & International Studies think tank in Washington. One obvious potential snag, however, is that China is famously sensitive to any perceived foreign meddling.

5. Get America's House in Order: China isn't forcing Americans to live beyond their means. If the U.S. consumed less and produced more, its trade deficit with China—and the rest of the world—would shrink. Says Morgan Stanley's Roach: "We ran bilateral trade deficits with over 90 countries. The reason we did that is because we don't save."

Innovation is as essential as saving. To justify a standard of living that's far above China's, the U.S. ought to produce goods and services that China is incapable of producing, and for which the world is willing to pay a premium. "Even if China didn't exist, we might want to do more R&D here," says Douglas Irwin, an economics professor at Dartmouth College who advocates free trade.

Putting things right at home is more easily said than done. Even as China proclaims that boosting consumption is a national priority—thereby recognizing the need to rebalance its economy—it is fighting the market forces that would reduce savings rates in China and raise savings in the U.S. That's the whole point of buying $900 billion of U.S. Treasuries to keep the dollar up and the yuan down. As for technical excellence, U.S.-based multinationals aren't making it easy for American workers to excel: They are building some of their most advanced facilities in China and training Chinese workers to operate them, Prestowitz notes.

No approach to China is foolproof. "If we think we're going to find a silver bullet, we ain't got one," says Myron Brilliant, senior vice-president for international affairs at the U.S. Chamber of Commerce. The only option is to make the best of a difficult situation, remembering that both sides have a lot to lose.

Coy is Bloomberg Businessweek's Economics editor. With Dexter Roberts in Beijing.

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