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November 1, 2007

TRADING PLACES

Congressional Democrats talk a good game when it comes to action on global trade, but it remains to be seen whether they will be any more effective than the Republican leadership before them.

Which major U.S. political party does the best job providing a favorable environment for the growth and well-being of domestic manufacturing?

Is it the supposed party of business and moneyed interests, the Republicans, or is it the Democrats, now in control of Congress, who seem to be surging toward the White House in 2008 and who for the last several years have been stridently vocal about the need for a new attitude on global trade?

The answer seems to be this: In a surprising flip-flop, the Democratic party seems to be most focused on trade—and not only because of the allegiance it owes to its important stronghold in organized labor. In fact, on the Democrats’ congressional watch, the debate about trade has shifted from a lockstep obeisance to the idea of “free trade” to an equal or greater concern about “free and fair” trade—i.e., trade in which all parties in formal agreements on global commerce are expected to honor those agreements in letter and spirit.

“This Congress is ripe for substantive change in our trade policies and practices, and in our trade agreement enforcement,” says Leo Hindery, Jr., chairman of The Horizon Project, an ongoing business and economic policy leaders group that develops economic, trade and competitive policy recommendations for Congress. Hindery, a former CEO of AT&T Broadband and Tele- Communications Inc., is now managing partner of InterMedia Partners, a private equity fund in New York. He is also the senior economic policy advisor for former Sen. John Edwards.

“In this current Senate, freshmen Senators Sherrod Brown [D-Ohio], Sheldon Whitehouse [D-Rhode Island], Claire McCaskill [D-Missouri] and Jim Webb [D-Virginia] all ran outspokenly and sensitively on jobs and job security issues and against unfair trade practices,” Hindery says.

Says Eli Lustgarten, a manufacturing sector analyst for Longbow Securities in Cleveland, Ohio: “The Democrats are trying to say that some of the [trade] agreements may or may not make sense. If we’re giving away too much, we should ask the question, ‘Why?’”

So, while the Bush administration and the previous Republican majorities in the House and Senate have been reluctant to act on such major issues as Chinese currency manipulation, the Democratic Congress has added pressure on China by conducting House and Senate hearings on a wide range of proposals. The banking and finance committees in the Senate have produced competing trade bills, and Chairman Charles Rangel of the House Ways and Means Committee says he will produce a bill that reconciles competing ideas in that chamber. At press time, a bill that aggressively addresses currency manipulation appears more likely than not to be approved in the House before the end of the year.

Possibly as a result of this new Congressional activity, the administration has shown new grit in dealings with China. Although Treasury Secretary Henry M. Paulson, Jr., continues to favor talk to substantive action with China over its deliberately undervalued currency, the administration has lodged several complaints against China with the World Trade Organization (WTO). One, filed in February, seeks WTO resolution of a dispute over subsidies and favorable tax policies that provide an illegal advantage in trade to Chinese and other foreign companies with significant investments in China. A second complaint focuses on China’s weak protection of intellectual property rights, and the third challenges Chinese restrictions against imports of movies, music recording and other recorded entertainment from foreign distributors.

In a major policy change, the administration in March approved the use of countervailing duties to redress damage done to the domestic paper industry from Chinese imports of coated free sheet paper. The decision to apply U.S. anti-subsidy law to imports from China, albeit in the case of a relatively minor category of imported good, reversed a 23-year-old policy of not applying countervailing duty law to non-market economy nations such as China.

“China’s economy has developed to the point that we can add another trade remedy tool, such as the countervailing duty law,” says Commerce Secretary Carlos M. Gutierrez. “Just as China has evolved, so has the range of our tools to make sure Americans are treated fairly.”

China, too, has responded mildly to the prospect of more rigorous Congressional trade oversight and the Bush administration’s firming backbone. China denounced the WTO cases and countervailing duty decision. But it also made the first change to its exchange rate policies since July 2005, when the value of the yuan, previously pegged at 8.28 to the U.S. dollar, was slightly revalued upward and permitted to float in a very narrow range (0.3% per day, up or down). China’s concession this year was to permit the yuan to float in a slightly broadened range of 0.5% per day. Like the July 2005 concessions, however, the most recent shifts have been more for show. When adjusted for inflation, the yuan’s value is no stronger today than it was in 2005.

NOT THERE YET

So should 2007 be marked as the year that Democrats—who under President Bill Clinton were pro-NAFTA free traders—turned the tide for free and fair trade?

Not yet, and the reason is that, despite all the talk, the hearings and the apparent impact on the administration and China, the Democratic Congress still hasn’t really done anything. Many bills have been proposed, but none have been passed and sent to Bush.

While the Bush administration momentarily seemed tougher on trade law enforcement, it has subsequently resumed its old ways. In June, for example, the U.S. Trade Representative rejected a Section 301 petition—a request under the Trade Act of 1974 for immediate redress of trade grievances— that had been filed by a bipartisan group of U.S. House members. The petition asked that a complaint be filed with the WTO, arguing that China’s exchange rate policies are inconsistent with International Monetary Fund rules. This marked the fourth time the U.S. Trade Representative has rejected similar Section 301 requests.

“The administration continues to believe that firm engagement with China, in concert with international institutions and other countries, offers the best chance of success,” says Susan C. Schwab, the trade representative. “We believe that China must move to adopt a flexible, marketbased exchange rate.”

In other words, more talk, no action, no pressure on China. The policy stalemate continues.

“We’re very strong supporters of Washington trying to do something with currency,” says James Hoffman, chief operating officer of Earle M. Jorgensen Co., a Lynwood, California-based supplier of steel and aluminum bar tubing and plate, and a unit of Reliance Steel & Aluminum Co. But, Hoffman notes—and this is the key, really, to any analysis of which party holds sway—“there hasn’t been much movement; nothing gets done.”

One reason is that any time it appears meaningful trade law change might be in the works, multinational companies that benefit from China’s mercantilist policies engage in sustained lobbying against a tough position on China. That’s been the case in the current debate, with multinationals, in various organizational guises, insisting that only “protectionists” would want to enforce existing trade laws or enact tougher new ones.

Rangel of the House Ways and Means Committee, certainly among the more fiercely lobbied congressmen, appeared in late fall to be seeking a workable solution to Chinese currency manipulation. The solution most favored by stalwart supporters of domestic manufacturers would be legislation that limits political discretion in application of countervailing duties to situations of currency manipulation. Such legislation would force any administration to intensify efforts to resolve such trade disputes.

In August, 18 freshman Democrats in the House, who campaigned on trade reform platforms, wrote to Rangel and the Ways and Means Committee, urging them to adopt legislation to “aggressively address China’s continued disregard for U.S. trade law and protect U.S. workers and manufacturers from the resulting unfair competition.” “I believe our nation’s trade laws are the last line of defense for U.S. companies and workers competing against unfair foreign trade practices,” says Rep. Michael A. Arcuri (D-New York), one of the 18. “These laws are based on principles that the international community has long agreed on. If we do not enforce them vigorously, we will be sending the world a signal that the rules do not matter and that they can violate them at will, without repercussions.”

ODD COUPLE

Reps. Tim Ryan (D-Ohio) and Duncan Hunter (R-California) are the odd-couple prime sponsors of H.R. 2942, which among other things would declare deliberate currency misalignment to be the equivalent of an illegal trade subsidy subject to countervailing duties. The two quickly rounded up nearly 100 colleagues in October in a campaign to keep countervailing duties in the compromise House bill. Among them was Arcuri, who says Ryan- Hunter “would remove political discretion by applying countervailing laws to non-market economies like China …” This “ensures the predictability our domestic manufacturers deserve,” he says.

At the same time, however, as of mid-October, 29 House members who were co-sponsors of Ryan-Hunter in the previous Congress were not co-sponsors of H.R. 2942, the legislation’s new version. There are many reasons for this, political observers say. Some previous supporters have changed their minds. Others are avoiding political debts that may be difficult to repay. Some report opposition to the legislation from multinationals with plants in their districts. Congressmen who felt politically vulnerable and reached out for promanufacturing voters last year feel stronger this year. Some don’t want to anger a committee chairman; others have new priorities.

“There’s a counteroffensive that has developed,” says David A. Harquist, a prominent Washington trade attorney and counsel to the China Currency Coalition, which for years has pushed for action to support domestic manufacturers against Chinese currency manipulation. “Now there’s a group of multinational corporations that is pressing against any kind of China legislation at all.”

Meanwhile, the trade deficit in goods is headed to more than $800 billion by year-end, or almost double the trade deficit in 2000, when George Bush was first elected president.

“American politics will always be a function of relative power and influence, but I believe that right now, the dynamic is changing substantially,” Hindery says. “We’ve lost millions of jobs overseas, with millions more gravely at risk, and most of those we’ve lost happened because of illegal, unfair and often government-assisted actions by some of our major trading partners.”

So, are Democrats the emerging party of trade?

“[It] isn’t or shouldn’t be a partisan issue,” Hindery says. “It’s a middle-class and worker issue. I’m not against free trade so long as it’s also fair trade. As things stand now, however, we’re getting killed.”