Tug-of-War Over Trade

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On a more pragmatic level, the U.S. needs China's cooperation on everything from trying to halt North Korea's nuclear-weapons program to building support for Iraq policy in the United Nations. That suggests Washington should play the trade card only sparingly. For now, the two sides are getting along well politically. Bush pleased Wen last week by saying he opposes efforts by Taiwan, which Beijing considers a renegade province, to alter its status.

China emerged as a global trade power 10 years ago, when it knocked off Taiwan and South Korea as the biggest exporter of sneakers to the U.S. Last year it surpassed Japan and Mexico as America's biggest single source of consumer electronics. That came at some cost to American jobs but at a big cost to countries that compete directly with China, such as its Asian neighbors and Mexico. Along the way, China became a vital link in the global supply chain. Some Dell notebook computers from China are made by a Taiwan-owned company called Compal using Taiwanese circuitry, a U.S.-made Intel chip and a screen from Korea. All those imported parts explain why, despite a projected trade surplus with the U.S. of between $120 billion and $130 billion for this year, China's worldwide surplus will be a slim $15 billion. As America's imports from China have risen, its imports from Taiwan, Singapore and Japan have declined.

China has achieved this critical global role not by protecting its economy but by throwing it open. Tariff rates are comparatively low, and this year it surpassed the U.S. as the world's biggest recipient of foreign investment, attracting an estimated $60 billion. Accusations that China manipulates its currency miss the point. The yuan is pegged to the dollar, which has dropped in value over the past year. So Chinese exports to the U.S. have indeed grown cheaper compared with those of other countries. To support its currency, China holds about $120 billion in U.S. Treasury bonds, thus lending America the money to keep its economy humming (thanks, Beijing, for financing those tax rebates).

The Chinese and American economies have grown so interconnected that even Beijing's efforts to throw Washington a bone by curbing some exports irritate certain U.S. firms. In October, China responded to U.S. pressure by reducing a tax rebate for firms selling abroad. Multinationals operating in China complained. "Foreign companies were hurt disproportionately because so many are set up for export and expected that rebate," says a senior executive of Motorola, which sells Chinese-made mobile phones around the world. Sales from foreign companies operating in China account for more than half of China's exports. That has made U.S. businesses especially wary of American protectionism, and small U.S. firms trying to compete with China tend to receive little sympathy from their larger cousins.

One justified criticism of China is its lack of workers' rights, which contributes to its cheap labor. In the southern boomtown of Shenzhen, a hundred workers who package computer keyboards and mice that they say bear the IBM logo walked off the job last week to demand the legal minimum wage of $73 a month and the legal overtime rate of 66¢ an hour instead of the 34¢ they received. Since independent unions are banned, they took their protest directly to the government, spending a night outside city hall. The next day their employer, a Hong Kong firm called Max Infosystems, raised salaries but cut meal subsidies by the same amount, according to one of the strike's organizers, Zou Quansheng, 22.

China's detractors still have powerful weapons at their disposal. Before agreeing to allow China into the World Trade Organization, Washington negotiated a deal giving it broad powers to block Chinese products that "surge" into the market — no proof of dumping or other wrongdoing required. As elections draw near, pressure to use those powers could come from people like Doug Bartlett. His father started Bartlett Manufacturing, a circuit-board maker in Cary, Ill., in 1952. By 2000, the family business had $22 million in sales and employed 180 people.

Since that banner year, the company has been in free fall. Bartlett says cheap Chinese imports have driven down both sales and his labor force to half their former levels. He blames China's "manipulated" currency and subsidized exports. Now he faces the stark choice of abandoning his community and moving operations abroad, or lobbying for more protection. "We hope to hang on until somebody comes to their senses in Washington," he says, "[but] I don't hold out much hope." And even if Washington wants to protect him, it doesn't have much ammunition to use against China.