Leave it to China to create bipartisanship in the typically polarized U.S. Congress. With U.S. unemployment hovering in the mid-9 percent range and unlikely to fall soon, and with mid-term elections just a week away, Republicans and Democrats alike are making China and its policies — from currency manipulation to trade tariffs — a convenient punching bag.
In a rare case of bipartisanship demonstrating how China has become one of Washington’s favorite scapegoats, an overwhelming majority in the House — including some 60 percent of the 178 Republicans — passed legislation in September that would allow the Obama administration to impose punitive tariffs on Chinese imports if the value of the yuan doesn’t rise substantially.
China is also the scapegoat in attack ads from both parties accusing their opponents of supporting “job-killing legislation.” Democrats accuse Republicans of supporting tax policies that promote outsourcing to China, while Republicans say cap-and-trade legislation favored by Democrats would render U.S. companies unable to compete with the Chinese and force them to shut down.
To be sure, there are plenty of other areas of dispute between the U.S. and China, such as punitive tariffs on steel, poultry and tires, but currency and jobs have garnered by far the most attention and feed speculation of a trade war.
A revalued yuan would boost U.S. exports to China and make Chinese goods more expensive, giving U.S. companies a better opportunity to compete against low-priced Chinese imports. Solar panel manufacturers such as Solyndra, Nanosolar and Miasolar provide a good example: All three have attracted investment from Silicon Valley, but face stiff competition from heavily subsidized Chinese companies.
China is showing some flexibility on currency, allowing the yuan to appreciate about 2.5 percent since the summer, but that’s far short of the 15 to 25 percent range demanded by most critics, including members of Congress.
Sen. Chuck Schumer, D-N.Y., plans to introduce legislation similar to the House bill during the lame-duck session in November and December. The bill would face tougher opposition in the Senate, but Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, said there’s “a very real possibility” it will pass.
“A lot of people think an undervalued renminbi (yuan) costs jobs, and I conveyed that to the Chinese leadership,” Baucus told reporters during a trip to China this month.
Side Bar: A Game of Chicken.
President Obama and Treasury Secretary Tim Geithner are stepping up the pressure on the diplomatic front. Currency was the top item in Obama’s discussions with Premier Wen Jiabao while they were in New York last month for the opening of the U.N. General Assembly, as it was for Geithner during the International Monetary Fund’s annual meeting in Washington this month. But they had little to show for their efforts.
The Treasury Department on Oct. 15 deferred a decision on whether to brand China a currency manipulator when it postponed its scheduled release of a semi-annual report on foreign-exchange rates.
China needs a more flexible currency policy, Wen and other officials acknowledge, but the government must move gradually to avoid disruption that could force thousands of Chinese factories to shut down and throw millions of workers onto the streets, they say.
That doesn’t get much sympathy in the U.S., with 15 million people out of work and little prospect of significant job gains for at least another year.
The uproar over currency comes as the U.S. trade deficit with China widens. A record $28 billion deficit in August brought the cumulative total for the first eight months of the year to $173.4 billion.
Business groups agree China needs a more flexible currency policy, but differ in their approach. The US-China Business Council “believes that China’s exchange rate should better reflect market influences from trade flows,” council President John Frisbie said. “However, USCBC believes that tariff legislation will be counterproductive to reaching that goal and at the same time harm American manufacturers.”
Frisbie warned that tariffs imposed under the legislation might violate World Trade Organization rules and prompt retaliation against U.S. manufacturers and farmers. Noting the House bill would base the tariff penalties on an estimate of the “true” value of the yuan, Frisbie said, “The problem is that 10 different economists will give you 10 different estimates.”
The US-China Business Council was one of about 35 associations, including manufacturers, farm groups and importer associations, signing a letter to Reps. Sander Levin, D-Mich., and Dave Camp, R-Mich., the chairman and ranking Republican on the House Ways and Means Committee, opposing the legislation, called the Currency Reform for Fair Trade Act. Signatories ranged from the giant U.S. Chamber of Commerce to small groups such as the Coalition of New England Companies for Trade.
Notably absent from the list of signatories was the National Association of Manufacturers. Frank Vargo, the NAM’s vice president for international economic affairs, said it decided two years ago it would neither support nor oppose currency legislation.
“Members were and are agreed that China’s currency is very undervalued and needs to appreciate significantly, but there was no agreement on whether legislation would help or hurt achievement of that goal,” Vargo said. “That remains our view today.”
The legislation’s supporters include the Fair Currency Coalition, which represents more than 40 business and labor organizations, as well as companies primarily in the steel and textile sectors. Members range from the American Iron and Steel Institute to the International Brotherhood of Electrical Workers.
Charles Blum, the coalition’s executive director, described the House bill as “a modest, targeted, WTO-consistent first step toward a comprehensive overhaul of our currency policy.”
While bilateral efforts such as Obama’s talks with Premier Wen last month have failed to pressure the Chinese to make any significant moves on currency appreciation, some China specialists say multilateral forums such as the Nov. 11-12 G-20 summit in Seoul offer the best prospects of reform. Another opportunity for a multilateral consensus on currency will come at the annual Asia Pacific Economic Cooperation summit in Yokohama in mid-November.
“China has a relatively easy opportunity convincing itself that the U.S. effort is to hold down Chinese exports and to maintain the U.S. position as the dominant power,” said Kenneth Lieberthal, a China expert at the Brookings Institute. “But when countries like Brazil are complaining about this, the Chinese don’t have as easy a time dismissing it. Chinese currency policy has the biggest impact not on the U.S.-China bilateral trade balance but on global imbalances that have a strong negative effect on many countries,” Lieberthal said.
That may be, but rather than pressuring the Chinese, countries such as Japan, Brazil and Korea seem more intent on lowering their own currencies in order to compete globally.
“That gives the Chinese the luxury of saying, ‘Why are you ganging up on us? We’re not the only players in this game,’ ” said Robert Kapp, a Washington state-based consultant on China trade and a former president of the US-China Business Council.
Kapp said a continuing stream of complaints by each side is possible, but he dismissed the possibility of a trade war, saying it would mean “complete retaliation.”
Steve Orlins, president of the National Committee on United States-China Relations, agreed: “It’s always possible, but it’s in the overwhelming interest of both sides not to let that happen,” he said.
“The implication that the Chinese are causing millions of job losses is economic fiction,” Orlins added. Rather than moving millions of jobs back to the U.S., the net gain from revaluation of the yuan might be as little as 10,000 U.S. jobs, with most jobs shifted out of China going to low-wage developing countries such as Indonesia, Vietnam and Sri Lanka, he said.
The U.S. and China may not be in a trade war, but there are an increasing number of skirmishes. Last month, the U.S. filed two cases at the WTO alleging discriminatory practices by the Chinese. One regards China’s imposition of anti-dumping and countervailing duties in April on imports of flat-rolled electrical steel produced by AK Steel and Allegheny Ludlum.
“The duties imposed by China have raised the price of hundreds of millions of dollars’ worth of U.S. steel headed into China, with the practical effect of reducing or blocking exports of our steel to that country,” U.S. Trade Representative Ron Kirk said.
The other complaint alleges China has discriminated against U.S. credit and debit card companies offering electronic payment. Kirk said Beijing was supposed to open this financial sector to foreign competition in December 2006.
Those and other U.S. green-technology companies may get a break. U.S. Trade Representative Ron Kirk on Oct. 15 announced the administration would investigate a complaint accusing China of illegally subsidizing its producers of wind and solar energy products, advanced batteries and energy-efficient vehicles. The petition, filed last month by the United Steelworkers, alleges China’s policies have caused the annual a substantial increase in the U.S. trade deficit with China in green-technology goods.
Contact William Armbruster at email@example.com.