"There's potential next year for greater friction in the trade relationship," Franklin Lavin, US Under Secretary of Commerce for International Trade, told a business lunch during a visit to Hong Kong.

Lavin said the United States' record trade deficit with China was not in itself a problem but barriers to market access for US companies in China were.

"From the Department of Commerce's point of view a pure bilateral trade deficit is not intrinsically a sign of a problem," he said. "We look at market access: can US businesses fairly compete?"

It was uncertain how US-Sino relations would be affected by Congressional elections in the United States last month, which gave the Democrats control of both the US House of Representatives and the Senate, he said.

China in the past two years had become much more ambivalent about the role of foreign direct investment in its economy and was becoming more selective and not always willing to let market forces work, Lavin said.

Meanwhile piracy remained widespread in China and a number of items were still subject to high tariffs.

Lavin hoped the two sides could resolve these issues without the US having to resort to formal trade action but said China needed to show flexibility.

Meetings in Beijing next week between Chinese officials and a top-level US delegation led by Treasury Secretary Henry Paulson, and including US Trade Representative Susan Schwab, would help, he said.

"The most effective way to resolve trade issues is through talking," he said. "The least effective way is formal trade action."

Massive increases in steel production capacity in China would lead to global oversupply in a few years if it continues at the current pace, resulting in dumping or subsidized trade, Lavin said.

However, he gave China generally high marks for completing its obligations in the first five years of its admission to the World Trade Organization.

He also said there was a window of opportunity in the next few months for the WTO to salvage the Doha Round of trade talks.

"The US needs to move," he said. "We are prepared to move but we're not going it alone."