China trade troubles may come to a head

The China currency issue seems to be coming to a head. Last month, Senators Charles Schumer (D, N.Y.) and Lindsey Graham (R, S.C.) offered an amendment to the State Department Authorization bill that would have mandated a 180-day negotiation p

By Dr. Paul Freedenberg,
Vice President Government Relations
AMT—The Association For Manufacturing Technology

The China currency issue seems to be coming to a head. Last month, Senators Charles Schumer (D, N.Y.) and Lindsey Graham (R, S.C.) offered an amendment to the State Department Authorization bill that would have mandated a 180-day negotiation period between the U.S. government and the Chinese to revalue the Chinese currency to a more reasonable ratio to the dollar. If the negotiations are not successful, the amendment will impose a 27.5% tariff on Chinese goods entering the U.S.

The amendment, which was based on legislation introduced earlier, is still pending and will give its sponsors leverage to get a vote on it as a section of this bill or as a freestanding bill during the current Congress.

Senator Evan Bayh (D, Ind.), who has a reputation as a moderate on trade issues, held up the nomination of Rob Portman to be the new U.S. Trade Representative (USTR) until he received a commitment from Finance Committee Chairman Charles Grassley (R, Iowa) that he would address the various forms of Chinese subsidies as part of a Committee hearing on Chinese trade practices in mid-July.

The Central American Free Trade Arrangement (CAFTA), which would be a rather noncontroversial trade agreement under normal circumstances, seems to be facing serious opposition. And it is coming not from the labor unions and sugar interests who would be expected to make problems for such a treaty, but from a number of members of Congress whose constituents are being injured by China trade and who are now in opposition to all efforts to expand trade. As one member remarked, "It is nice that CAFTA is likely to expand U.S. exports by $1 billion, but my constituents are asking me what I am doing about the $162 billion for which we are in hock to China."

That $162 billion bilateral trade deficit with China in 2004, an all-time record for any one country and increasing more than 20%/yr for the past 5 yr, makes it obvious that the current situation is unsustainable. The overall U.S. trade deficit last year was $617 billion, itself a bad sign, but it is the bilateral trade deficit with China that has gotten the attention of Congress.

Congressional critics of China point to the fact that the Chinese Government has intervened in the currency markets repeatedly over the past 5 yr to buy up dollars and keep the Chinese yuan trading at approximately 8.25 to the dollar. This is where it has been for the past 11 yr (despite the fact that the Chinese economy has grown at a rate of more than 8%/yr during that period). With China now holding more than $600 billion of U.S. dollar instruments, it has become our second largest creditor after Japan (which stands standard developmental economics on its head, since the textbooks say we should be lending China dollars to buy our goods).

As Senators Graham, Schumer, and a number of their colleagues point out, both the World Trade Organization (WTO) and the International Monetary Fund (IMF) prohibit the practice of "currency manipulation" to gain a trade or competitive advantage. The only question is whether the Chinese practice of pegging their currency to the dollar should be defined as manipulation. The issue is not likely to be debated within those organizations. Congress is likely to continue to hammer away at the Bush Administration, calling on the President to take action against China and using the IMF and WTO rules as justification for such action.

It is impossible to predict the outcome of this congressional pulling and tugging over China. But one thing is certain. It is no longer an issue that can be ignored. Critics are likely to attempt to insert it into every trade measure that comes before Congress until they are satisfied that the Administration has taken meaningful action.

You can help revitalize U.S. manufacturing! Send this page to your Congressman, local and state government leaders, or your local newspaper editor. Add your own comments on the importance of manufacturing innovation to the health of our economy. Your comments are also welcome at pfreedenberg@ AMTonline.org

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