China, U.S., Europe battling over a shrinking global-trade pie

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In polite, diplomatic language, China this week accused Eurozone leaders of piling up debts that threaten a global economic crisis, and the Europeans countered with complaints that Beijing manipulates its currency to unfairly skew trade in its favor.

The subtle verbal shots fired on the fringes of the Asia-Europe Summit in Vientiane, Laos, echo a theme raised during the U.S. presidential election, when Republican challenger Mitt Romney vowed to take up the gauntlet of a trade war he said had been thrown down by China.

Both battles reflect the fear and uncertainty confronting the world’s biggest economies in this fifth year of stalled growth and persistent recession, trade experts say. And with little hope on the horizon for revving the main economic engines any time soon, the rhetoric and posturing are likely to grow sooner than the rivals’ bottom lines.

The European Union is China’s largest trading partner, and the sovereign debt crisis afflicting the 17 nations that use the euro common currency has been cutting into Europeans’ ability to buy Chinese goods. On Monday, Chinese Premier Wen Jiabao told the European delegates that they needed to come up with “a clear and reliable’ plan for resolving the debt crisis that is stifling growth and trade.

French President Francois Hollande countered with a swipe at China’s artificially suppressed currency value, which makes Chinese products cheaper than they should be and contributes to the trade imbalance favoring Beijing.

‘Europe has always trusted the market on condition that the rule of reciprocity is the same for everyone,’ Hollande said, alluding to the artificially set value of the Chinese yuan, also known as the renminbi. ‘We need to have equal exchange. We believe in an open market system.’

Trade and economic analysts say China has moved some distance to correct currency distortion over the last few years, with the yuan exchange rate improving from more than 8 to the dollar to 6.29 on Tuesday. That’s close to a 25% appreciation, most of it in the last four years, noted Perry Wong, director of research for the Milken Institute and a frequent visitor to China.

Some economists set the actual value at closer to 5 yuan to the dollar, but full correction cannot be accomplished overnight, Wong said.

‘Transformation in China will take time. In terms of structural change, for them to rely less on exports and import more goods from foreign countries, and to promote the quality of labor in China, will take years,’ Wong said. Most countries intervene to some degree to ‘more fully accommodate their own domestic economic agendas,’ he added, including the U.S. Federal Reserve Board policy of quantitative easing.

China’s alarm over the European debt crisis is justified, as it could portend a coming period of global economic upheaval, said Bruce Abramson, a partner with the Rimon Law Group and an expert in valuation, intellectual property, trade and competition.

‘The Eurozone crisis is likely to spread into a global monetary crisis. It’s a testament to the Eurocrats that they have held it together as long as they have,’ said Abramson, predicting a five- to 10-year period of recession or feeble growth on the continent, in the United States and potentially in China. Growth this year in China’s economy is pegged at 7.4%, down from 10% to 12% only a few years ago.

The persistent pressures presage more friction over trade rules and practices, Abramson said.

‘Economic growth is a necessary prerequisite for peace, tolerance, acceptance -- all kinds of good things. But when the pie is shrinking, everybody, whether local, individual or national, worries about how to hold on to what they already have.’

When you’ve got 10 people vying for control of only nine things of value, ‘you either learn how to make more things or how to have fewer people,’ he said. ‘More things is economic growth. Fewer people is war.’

Jamie Metzl, a senior fellow at the Asia Society, said voices within China’s centrally planned economy are gaining strength in their calls for structural reforms that would boost wages and social services for Chinese workers and find a better trade balance by allowing the currency to float to its actual exchange value.

‘China is making preliminary steps toward making its economy less oriented toward exports, but the economy is still massively oriented toward exports,’ Metzl said, pegging the share of its output sold abroad at 70%.

That imbalance will persist as long as the yuan is undervalued and workers are underpaid, Metzl said.

‘Certainly recession in Europe and sluggish growth in the United States are harming China’s ability to export. But unless China undertakes significant structural reforms, growth in China is very likely to continue to decelerate because of the inherent problems and imbalances,’ he said.

China’s communist government also plays ‘way too strong a role in the domestic economy,’ he added, which stifles innovation in the private sector that would make Chinese products more competitive and foster a healthier global trade environment.

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Insert: Chinese Premier Wen Jiabao arrives at the Asia-Europe Summit in Vientiane, Laos, on Tuesday. Credit: Barbara Walton / European Pressphoto Agency