EU showing modest change to defecit with China

The European Union issued new figures on Friday showing that the bloc's trade deficit with China narrowed in the first half of the year, three days from a bilateral summit in China.

In the first half of 2009, when the euro was rising against the dollar, to which the Chinese yuan is de-facto pegged, the value of EU exports to China fell to 37 billion euros (55.5 billion dollars) from 39 billion dollars in the corresponding period of 2008.

The EU's statistics agency said imports fell faster to 103 billion euros from 112 billion euros, meaning the trade deficit for the 27 EU countries with China dropped to 65 billion euros from 73 billion euros between January and June last year.

However, the fall "was less steep than the general downward trend" in the EU's total external trade, said a statement from Eurostat, which highlighted China's place as the bloc's second most important trading partner after the United States.

European Central Bank governor Jean-Claude Trichet, outgoing Economic and Monetary Affairs Commissioner Joaquin Almunia -- due to take up the competition portfolio -- and the formal head of the group of 16 countries that use the euro, Luxembourg Prime Minister Jean-Claude Juncker, will hold talks with Chinese Premier Wen Jiabao on Sunday.

These precede the first full summit between the EU and China in two years, after last year's was cancelled amid Beijing protests at French President Nicolas Sarkozy hosting Tibet's spiritual leader the Dalai Lama.

60% of US deficit debt is with China - $22.1 Billion

On Friday, as President Obama crossed the Pacific to begin his first trip to Asia, the Census Bureau released its monthly trade tally.

The headline was that the U.S. trade deficit grew to $36.5 billion in September, more than forecasters expected and the biggest such figure since January.

Incredibly, the really dramatic number was that 60.5% of the deficit, or $22.1 billion, was with just one country: China.

Obama arrived in Beijing Monday, but experts don't expect anything to get resolved. The U.S.-China economic relationship has become far too complicated and contradictory to benefit from simple solutions.

Within the U.S., the imbalance is mainly seen as the product of protectionist policies by China, in particular China's refusal to let its currency, the yuan, appreciate against the dollar.

It's universally agreed in all countries, except China, that a freely floating yuan would be worth significantly more than the 15 cents it currently trades for. By keeping its currency's value artificially low, China makes its products cheaper in the U.S., thus encouraging and maintaining the imbalance in trade.

History shows us that when China linked its currency to the dollar in the early 1990s, it was not out to create trade surpluses but to establish a bit of stability in the turbulent global currency markets.

During the emerging-market currency crises of 1997 and 1998, China's success in keeping the yuan fixed at 8.3 yuan to the dollar was applauded in the West as a major contribution to averting financial chaos.

Since 2005, China has been willing to allow the yuan to appreciate a bit (the current exchange rate is 6.8 yuan to the dollar) but only on its own extremely conservative terms.

Meanwhile, in China, it is fashionable to blame U.S. trade deficits on the debt-addicted ways of American citizens and their government and there may be an element of truth to this.

If the U.S. borrowed and spent less, its trade imbalances would be smaller but China has been enabling this profligate behaviour for years by buying trillions of dollars in U.S. government debt and mortgage securities as part of its long term strategy and continuing efforts, to keep the yuan from appreciating against the dollar.

It's a bit reminiscent of the seemingly endless wrangles in the late 1980s and early 1990s with Japan, which accounted for the bulk of the U.S. trade deficit in those days. The trade deficit with Japan never shrank much in dollar terms, but it became smaller as a share of GDP starting in the mid-1990s, and was eclipsed by the trade imbalance with China in 2000 (in September the U.S. trade deficit with Japan was $4.1 billion, compared to $22.1 billion with China).

The issue was never resolved, but it ceased to seem so important. The question now is whether the same could happen with China?