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It's time to petition the government

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

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

On a number of occasions, this column has discussed the Chinese government's practice of undervaluing its currency. Now it looks as though this issue is headed toward a major showdown. The Fair Currency Alliance, of which AMT The Association For Manufacturing Technology is a member, will soon be filing a petition under Section 301 of the Trade Act of 1974 with the U.S. government asserting that, among other things, China's practice of undervaluing its currency "nullifies and impairs" the obligations that the Chinese government undertook when it became a member of the World Trade Organization (WTO).

Section 301 allows U.S. persons to petition the U.S. Trade Representative (USTR) for relief when the United States' legal rights or benefits under a trade agreement are being violated or denied and/or when a foreign government's acts, policies, or practices are unreasonable or discriminatory and burden or restrict U.S. commerce. The USTR then has 45 days to initiate an investigation of the allegations. If the allegations are confirmed, the President must take action to enforce the rights of the U.S. or to eliminate the foreign government's offensive actions, policies, or practices. It is my understanding that the draft petition alleges under Section 301 that the Chinese government's undervaluation of its currency at the rate of 8.28 yuan to the U.S. dollar violates China's international legal obligations to the U.S. (under both the WTO and the International Monetary Fund) and unreasonably and discriminatorily burdens and restricts U.S. commerce.

The fact that the Chinese government has intervened (in one direction) in the international currency markets to buy U.S. dollar instruments in the range of approximately $7 billion per month over the past few years is beyond dispute. China now holds approximately $140 billion of U.S. dollar instruments (which equates to about one-tenth of China's annual GDP). This practice has prompted other Asian governments to depress the price of their currency so they won't lose additional market share to China. The combined effect of these interventions has negated the depreciation of the dollar against Asian currencies that has occurred in every other currency market around the world (with the dollar falling approximately 40% against its high point relative to the euro).

The question remains, however, how the Administration will react to this 301 petition. With trade being such a big issue in the Presidential campaign, and the bilateral trade deficit with China hitting $130 billion last year, it would be difficult for the Administration to ignore the petition or to reject it on a technicality. On the other hand, the Chinese have strongly resisted any suggestions that they revalue their currency upward by any significant amount, and the idea of floating their currency seems to be out of the question, given the weakness of their banking system and the dangers of "hot money" flowing in and out of their economy. Furthermore, since this issue has not been addressed in any meaningful way during the previous 10 years, it is clear that a sudden revaluation of 40%, 30%, or even 20% would have a profound impact on the world economy, in general, and on the U.S. economy in particular.

Nonetheless, in earlier columns, I have laid out the negative economic impact that an undervalued Chinese currency has had on the U.S. economy. Those effects have grown so large that they can no longer be ignored. Undoubtedly, that undervaluation has accelerated the movement of U.S. industry — inducing it to relocate in a country where it can take advantage of a huge price subsidy. That, in turn, has had a direct and dire effect on employment in the industrial sector of the U.S. These issues are sure to be debated in the upcoming Presidential campaign, but now the Section 301 petition will ensure that the policymakers in the U.S. government confront this issue as well.

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