HONG KONG (Reuters) -- The United States sees potentially escalating trade friction with China next year as Beijing is stepping up restrictions on foreign investment and recent U.S. Congressional elections create uncertainty, a U.S. trade official said on Friday.

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

Will Treasury Secretary Paulson head off trouble during a visit to China next week?
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Lavin said the United States' record trade deficit with China was not in itself a problem but barriers to market access for U.S. 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 U.S. businesses fairly compete?"

It was uncertain how U.S.-Sino relations would be affected by Congressional elections in the United States last month, which gave the Democrats control of both the U.S. 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 U.S. 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 U.S. delegation led by Treasury Secretary Henry Paulson, and including U.S. 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 U.S. needs to move," he said. "We are prepared to move but we're not going it alone."

Washington was looking primarily at Brussels to make a move as well.

"We know, as does Brussels, that we've got distortions in our markets, principally agriculture," he said.