U.S. and China begin second round of high-level economic discussions

Huge delegations of China ad the U.S. are having their second round of high-level discussions aimed at lessening economic tensions. They must achieve sufficient success to blunt growing protectionist pressures in the U.S. Congress.

The Bush administration is expressing the hope that deals will be reached that will expand opportunities for American air carriers to fly to China and for American banks and stock brokerage firms to do business there.

The meetings are to begin Tuesday with opening remarks from Treasury Secretary Henry Paulson and Chinese Vice Premier Wu Yi.

Paulson is leading a U.S. delegation, which includes top officials from 10 Cabinet-level agencies and Federal Reserve Chairman Ben Bernanke. Wu's team is expected to include 14 Cabinet-level ministers.

A similar collection of high-powered talent was assembled for the first session of the Strategic Economic Dialogue last December in Beijing. Under an agreement announced last fall, the two countries plan to meet twice a year to discuss a large range of economic issues.

The two sides will dine Tuesday night at the State Department. The Chinese delegation also will meet with President George W. Bush during the visit and have private talks with key members of Congress.

Unhappiness about the growing U.S trade deficit with China is threatening to provoke a protectionist backlash in Congress. Lawmakers are expressing outrage over a trade gap that last year hit an all-time high of $232.5 billion (EUR173 billion), the largest deficit ever recorded with a single country and one-third of America's record overall deficit of $765.3 billion (EUR569.25 billion).

Members of Congress are promoting a number of bills that would impose penalty tariffs on Chinese products unless China does more to stop what U.S. critics see as unfair trade practices such as China's currency system and the rampant piracy of American products.

American manufacturers contend that China is manipulating its currency to keep it undervalued against the dollar by as much as 40 percent, making Chinese goods cheaper in the U.S. market and American products more expensive in China.

Last week, a bipartisan group of 42 members of the House of Representatives petitioned the Bush administration to bring a trade case against China on the currency issue. Lawmakers said they were not impressed by China's announcement on Friday that it was slightly widening the daily trading range for the yuan, which could allow the currency to rise in value more quickly.

Democratic Sen. Charles Schumer, a leading critic of China, called the currency action a "nice gesture, but in the past, most of their gestures have not produced any concrete change."

Schumer has said China must move more quickly if it wants to derail a congressional push for punitive legislation that some fear could be the start of a full-blown trade war between the two nations.

There were reports that China seriously considered calling off this round of talks after the Bush administration, in an effort to pre-empt tougher actions in Congress, imposed penalty tariffs on Chinese paper products in a fight over government subsidies and filed two cases against China before the World Trade Organization.

But China in recent days has made a number of moves in an effort to defuse American unhappiness. In addition to announcing the slight change in its currency band, China said early in the month that it would buy $4.3 billion (EUR3.2 billion) in American high-technology products from such companies as Microsoft Corp., Oracle Corp. and Hewlett Packard Co. in its latest U.S. buying spree.

And over the weekend, China announced that it would invest $3 billion (EUR2.2 billion) of its $1.2 trillion (EUR890 billion) in foreign currency reserves in Blackstone Group LP, the second-largest U.S. private equity firm.

It remains to be seen whether the new flurry of activity will be enough to persuade members of Congress to stop pushing for punitive sanctions in light of a still-rising trade gap with China and voter unhappiness over 3.2 million U.S. manufacturing jobs lost since 2000.

"I think Congress will end up penalizing the Chinese in some way for what lawmakers regard as an undervalued exchange rate," said Gary Hufbauer, a trade expert at the Peterson Institute, a Washington think tank. "The details of how the penalties will be crafted and what kind of flexibility the administration will be given in imposing them will all be subject to debate."