Among the many trade issues plaguing U.S. manufacturing today, none is more critical than the undervaluation of the Chinese currency. By not allowing its currency to rise in value against the U.S. dollar, China benefits from what amounts to an estimated 40% subsidy on its exports, while U.S. goods imported into China face a 40% price disadvantage.
Attempts by Congress to find a solution to the currency imbalance languished last year. The solution favored by domestic manufacturers, H.R. 1498, or the China Currency Act of 2005, remained bottled up in committee, as the Bush administration and House Republican leadership insisted that China eventually will respond to ongoing diplomatic pressure to make important policy adjustments.
Sentiment changes slowly in Washington, but there are signs this year that H.R. 1498 will emerge again or that the currency manipulation problem, not just in China but in Asia, will be addressed in an effective way.
Congress is increasingly restless with Chinese inaction on currency and other trade issues. The bill steadily has gained support and as of February had 147 co-sponsors (75 Republicans, including four committee chairmen, plus 71 Democrats and one independent), up from 121 sponsors in September. A companion bill may soon be introduced in the Senate, says M. Robert Weidner, III, chairman and chief executive officer of the Metals Service Center Institute, among the most active advocates of H.R. 1498. There are also new indications that the National Association of Manufacturers, (NAM), the only manufacturing organization with widespread clout in Washington, is turning serious about finding a workable solution to the China currency question.
ODYSSEY OF A BILL
Jointly authored by a Republican, Duncan Hunter of California, chairman of the House Armed Services Committee, and a Democrat, Tim Ryan of Ohio, the Chinese Currency Act of 2005 has the backing of a broad-based group of manufacturing, textile, agricultural and labor interests, many of them members of the China Currency Coalition, an independent advocacy organization.
“I am concerned by the actions of the communist Chinese government to manipulate its own currency and I believe we have offered an appropriate legislative solution ,” Hunter said in a statement. “Currency manipulation is not only having an erosive effect on America's manufacturing base, but it's a direct threat to our national security.”
Domestic manufacturers support the bill because it provides a way to address currency manipulation by the Chinese and other nations within the framework of existing U.S. trade law and the requirements of the World Trade Organization. H.R. 1498 permits the use of countervailing duties to seek relief from harm done by a manipulated currency, and defines exchange rate manipulation, including deliberate undervaluing of a currency, as an illegal export subsidy, using the International Monetary Fund's definition of “exchange rate manipulation.”
The bill also outlines how the Commerce Department should determine whether currency manipulation exists, and requires the U.S. International Trade Commission to determine whether an industry has been injured because of it.
By making currency manipulation a prohibited export subsidy, it would allow any industry threatened or injured by imports undervalued because of currency manipulation to file a petition seeking the imposition of countervailing duties on those imports. The goal is to pressure China to revalue its currency, opening new markets in China to U.S.-made goods and allowing U.S. manufacturers to compete with Chinese imports.
The bill was sent to the House Ways and Means Committee last April, and since then, there has been no action and no indication that the committee's chairman, Bill Thomas of California, would schedule it for a hearing.
One of the problems has been the conflict at NAM between multinational companies that manufacture goods in China for export to the U.S., and thus benefit from the current inequity, and the domestic manufacturers that are hurt by the undervalued yuan. Last year, for example, U.S-funded companies in China exported goods valued at $75 billion and did another $75 billion in sales within China, the official People's Daily newspaper reported.
“A lot of the multinational corporations are enjoying the status quo,” Ryan said in an interview. “They manufacture in China, ship the goods back here, and enjoy a 40-cent on the dollar advantage. Life is good for them.”
In addition, the soaring budget deficit put the administration in an awkward position in negotiations over currency since China is a major holder of U.S. debt.
Those pressing for Congressional action say the administration's continuing reluctance to deal sternly with China on currency was underscored in late November when the Treasury Department issued its semiannual report in which it refrained from labeling China as a currency manipulator, although the department found that China's “exchange rate is very tightly controlled…the distortions and risks created by China's rigid exchange rate still persist.”
In September, a divided NAM didn't take a position on Ryan-Hunter, but instead put its weight behind a another bill related to Chinese trade subsidies, H.R. 3283, the United States Trade Rights Enforcement Act, sponsored by Rep. Phil English (R-Pennsylvania).
Patricia Mears, NAM's director of international commercial affairs, said the board backed the English bill because it stood a better chance at passage as the House leadership was dead set against Ryan-Hunter, which she still believes to be the case.
Critics say H.R. 3283, which was adopted by the House, is toothless and ineffective and fails to address the currency issue specifically. But Mears says the English bill serves as a necessary first step to clarify that countervailing duty law should apply to non-market economies.
NAM's China working group, under the chairmanship of Jerry Prout, vice president of government affairs for Philadelphia-based chemicals giant FMC Corp. continues to search for other ways to deal with currency manipulation and has been talking to members of the administration on the issue. The committee planned to present its ideas to the NAM board in early March.
“They're looking around to see what might be out there as a remedy, what tools might there be for companies facing competition,” Mears says.
Advocates of the bill say an April visit to Washington by China's President Hu Jintao will be of great importance. Under increasing international pressure to reform the country's shaky banking system and skewed currency, there is a possibility that Hu will take the high road and launch some serious reforms in advance, says David A. “Skip” Hartquist, counsel to the China Currency Coalition and senior partner in the Washington law firm of Collier Shannon Scott. That would take pressure off the administration and permit Bush and Hu to focus on other matters.
The coalition would like to see a 40% revaluation of China's currency, but it's more likely that Hu would launch a more modest revaluation with plans for additional change. China took similar steps in July, when it ended its rigid peg of the yuan to the U.S. dollar, replacing it with a “managed float” against a basket of foreign currencies, and revalued the currency by about 2.1%. Since that time, severe trading restrictions have kept the yuan's value essentially unchanged. To some, China's clever manipulation of the political situation suggests that anything short of substantive revaluation may be just another ruse.
The Chinese, “don't like to be seen as acting under pressure. They want to take action on their own time,” Hartquist says.
If Hu digs in and takes a hard line, it is likely to galvanize Congressional support for a tougher bill like H.R. 1498 and even push the Bush administration to alter its previously conciliatory position.
“The problem has to mani-fest itself,” says a spokesman for Hunter.
Already, the Treasury Department is taking a tougher stance.
In a talk last month at a seminar sponsored the American Enterprise Institute, Under Secretary for International Affairs Tim Adams acknowledged that Treasury was late involving other parties such as the International Monetary Fund (IMF) and the G-7 nations to take a multilateral approach to the currency problem—an omission the U.S. was trying to correct.
Adams said in his prepared remarks that the IMF should never accept “uncritically a country's choice of exchange rate regime,” and that the IMF should “improve its tools and advocacy to persuade countries to exit unsustainable exchange regimes early on.”
And Hartquist says a high ranking official in the Bush administration who works on China issues, but declined to name, nevertheless told him that pro-1498 forces have effectively kept the issue on the front burner.
“Bush can't meet with the Chinese without mentioning (the currency issue),” Hartquist says. ‘We've kept it in the spotlight.”