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WASHINGTON - US-China ties are headed for turbulence as combative US lawmakers threaten Beijing with punitive trade sanctions that could draw the ire of the Chinese leadership.
A week of high-level talks in Washington failed to end their biggest dispute, China's undervalued currency, opening the prospect of a trade war between the world's richest and the most rapidly growing nation, analysts said.
The Pentagon warned Friday that cash-flush China was militarizing under an opaque budget and that Beijing's ballistic nuclear missiles could now strike the United States.
The Bush administration seems to have taken a more aggressive trade stance, while majority Democrats, and many Republicans in Congress, discuss passing, not just proposing, anti-China bills.
"Previous instances of (US) protectionist rhetoric have ended in little action, but the risks of actual action are a bit higher this time," warned Goldman Sachs analyst Alec Phillips.
Protectionist sentiment in Washington is high despite low US unemployment and inflation and record equity prices, which would normally stymie such sentiment, he said.
"This raises two risks. First, the Congress, which has become increasingly hostile toward trade, could impose policies that could sour the US-China economic relationship.
"Second, a softer labour market, in particular, might raise tensions beyond their already elevated levels today," Phillips warned.
Talks led by Chinese Vice Premier Wu Li and US Treasury Secretary Henry Paulson, as well as subsequent discussions between the Chinese leader and US lawmakers, failed to end concerns over the yuan.
Lawmakers say China undervalues the yuan, making US-bound exports cheaper and fuelling the US-China trade deficit, at 232.5 billion dollars last year.
Despite heavy US dependence on China, some lawmakers want trade sanctions, including a possible a 20 percent across-the-board tariff on Chinese goods.
Anti-China trade bills being drafted in Congress "could ultimately disrupt bilateral trade flows, and more importantly, capital inflows from China," warned Bank of America strategist Joseph Quinlan.
"America's financial sugar daddy" is China, because it has capital "for a nation that abhors savings, worships spending and is addicted to other people's money."
"While this is a worrisome development in and of itself, even more worrisome is that the United States has decided to play hardball with China over trade at a time when America's financial dependence on that nation has never been greater," Quinlan said.
Reportedly, two-thirds of China's 1.2 trillion dollars in reserves are in dollar-denominated assets, including 420 billion in US Treasury bills.
China said it will not tolerate US trade sanctions after Washington hauled it before the World Trade Organization for copyright piracy and barriers to US music, films and books.
During a major speech after her Washington visit, Wu said China would "fight to the end" the two WTO suits.
This "will surely have serious impact" on bilateral intellectual property rights cooperation and "damage the already established bilateral cooperative ties on market access for publications," Wu said.
"Any attempt to impose pressure on the (yuan) for its considerable revaluation cannot help at all and could probably injure the interests of the two countries and the public," she said.
The United States estimates the dollar is overvalued by as much as 40 percent against the yuan.
Washington is also concerned China is spending its mountain of foreign reserves on its military.
An annual Pentagon report on Friday said China could be "planning for pre-emptive military options in advance of regional crises."
US Defense Secretary Robert Gates said the report "paints a picture of a country that is devoting substantial resources to the military and developing ... some very sophisticated capabilities."
Experts say the United States and China need each other.
"China needs access to the US market in order to keep its export machine humming. While the United States could get its tennis rackets and running shoes from another supplier, the world's largest debtor nation would be hard-pressed to pay for them without Chinese capital," Quinlan said. – AFP/ir
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