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Congress Takes Aim At China

Multinationals fear retaliation as lawmakers step up pressure on Beijing's trade practices

by Glenn Hess
November 19, 2007 | A version of this story appeared in Volume 85, Issue 47

Credit: Shutterstock
Many lawmakers believe China is manipulating its exchange rate to gain an unfair trade advantage over the U.S.
Credit: Shutterstock
Many lawmakers believe China is manipulating its exchange rate to gain an unfair trade advantage over the U.S.

Fearful of rising protectionist sentiment in the halls of Congress, U.S.-based multinational companies, including a number of major chemical makers as well as the Bush Administration, are urging lawmakers to reject legislation that would punish China for undervaluing its currency and subsidizing exports. Critics contend that those actions have contributed to the burgeoning national trade deficit with the Asian export giant and the loss of manufacturing jobs in America.

More than 150 companies and trade associations from a range of industry sectors recently warned in a letter to all 535 members of the House and Senate that the proposed measures would be counterproductive and could undermine commercial relations between the U.S. and China, which has the world's fastest growing economy.

"Imposing unfair barriers to trade in the name of currency valuation or product safety is not a solution to the underlying concerns, and it ultimately undermines the important work that should be undertaken to prepare our economy and our workers for the realities of the global economy," the businesses wrote in the letter organized by the US-China Business Council. The council represents U.S. corporations that do business with China, including Arch Chemicals, Dow Chemical, DuPont, Eastman Chemical, and Rohm and Haas.

"Conversely, policies that single out individual countries as responsible for the U.S.'s broader concerns will not be effective and should be rejected, as should approaches that violate the U.S.'s own international obligations or that improperly restrict access to the U.S. market," the companies stated in their letter. "Doing so can only undermine U.S. credibility and competitiveness and put U.S. exports at substantial risk of retaliatory action."

The message from corporate America comes as Congress weighs legislative options for dealing with China's state-controlled exchange rate, which critics charge is being kept artificially low against the dollar, making it easier for Chinese companies to export products to the U.S. at the expense of U.S. manufacturing. The topic has become a hot one on Capitol Hill, as three presidential candidates have signed onto bills aimed at pressuring China to let its currency rise in value.

Many lawmakers believe that China's currency, the yuan, is undervalued by as much as 40%, giving Chinese exporters, many partially owned by the government, an unfair advantage in international trade. While American consumers benefit from the availability of low-priced Chinese goods, the U.S. trade deficit with China hit a record $232.6 billion last year, up from $202 billion in 2005. Even though safety concerns have been raised in recent months about a host of Chinese products, from tainted toothpaste to toys containing lead paint, the U.S.-China trade gap is on pace to reach another all-time high this year.

Two Senate committees passed competing China currency bills shortly before Congress took its August break. Staff-level negotiations to reconcile the measures have begun, and consolidated legislation is expected to come to the Senate floor for a vote early next year. House Speaker Nancy Pelosi (D-Calif.), who has harshly criticized China for years about its policies on human rights and trade, has said her chamber will also move forward with a bill soon. Pelosi's district includes San Francisco's Chinatown, which traditionally has taken an anti-Beijing stance.

But many U.S. businesses fear Congress could create far more problems than it solves by aggravating relations with China. "The purpose of the letter was to point out to Congress that there are things we can do to help effect positive change," says Lisa M. Schroeter, director of international trade policy for Dow Chemical, which has been operating in China since the country began opening itself to the outside world in 1979.

"We've had great experiences working with the various agencies of the Chinese government on things like climate change," Schroeter says. "We have a public/private-sector partnership with the State Environmental Protection Agency on promoting clean production processes in downstream Chinese chemical companies. There are opportunities to work together, to share what we've learned to do really well and help integrate, expand, and liberalize the Chinese system."

Patricia Mears, director of international commercial affairs for the National Association of Manufacturers (NAM), the U.S.'s largest industrial trade association, says punitive trade legislation could invite retaliation. "There is a lot of fear of this," she says. "Individual companies that are very involved in China are concerned that this could provoke a tit-for-tat trade war."

Washington and Beijing have a series of disputes before the Geneva-based World Trade Organization (WTO) over possible Chinese subsidies meant to boost exports, as well as protection of intellectual property rights and other issues, Mears notes. "China has to understand that this is the way mature trading partners behave when they have a dispute. We have them with the European Union all the time," she says. "But China doesn't have much experience with that yet."

Chinese leaders have said they plan to eventually allow the yuan to float freely and let the market determine its value, but they insist the move must be gradual to allow their banks and exporters to gain expertise in managing the risks of currency fluctuation. "The main reason for China's trade surplus is not the foreign exchange rate but an imbalanced domestic economy," Wu Xiaoling, deputy governor of the People's Bank of China, said on Oct. 19 at a conference hosted by the Peterson Institute for International Economics, a Washington, D.C., think tank.

Moving too fast would hurt China and ultimately the global economy, Wu insisted, because China has become an engine of growth in the world economy. "We are not rushing things as some people wish us to do, but we are moving in the correct direction in a smooth manner, and I think this will benefit us all," she declared.

In July 2005, after U.S. complaints, China reversed its practice of fixing the value of the yuan to the dollar by immediately appreciating the value of the currency by 2.1% and then allowing it to slowly adjust against a "basket" of major currencies. Since moving from a fixed exchange rate to a "managed float" regime, the yuan has appreciated by about 10%.

Credit: Courtesy Of Max Baucus
Credit: Courtesy Of Max Baucus

"The fact that China has unpegged from the dollar and started to allow a managed float is huge progress," Schroeter says. "I think more substantially—and we've seen this as an investor in China—the steps they've undertaken to implement and live up to their WTO commitments have been extraordinary. Certainly from a chemical industry standpoint, there have been great opportunities particularly for investors as China has lived up to its commitments to allow more foreign investment, more participation in the sector." China agreed to abide by the rules of international trade when it joined WTO in December 2001.

Although China has been pursuing economic reforms for several years, Mears points out that moving from a socialist system to a market-based economy is a complicated endeavor. "China has a very difficult task. They have thus far internally avoided a move that would have caused serious harm to their economy," she says. "I do think that because they are such a large force in international trade, there is increasing pressure for them to move a little faster."

On Capitol Hill, lawmakers have grown impatient with China's slow pace of change. "China needs, at the very least, a nudge," Senate Finance Committee Chairman Max Baucus (D-Mont.) remarked after his panel voted 20 to 1 on July 26 to approve legislation that would allow U.S. companies to seek antidumping duties against goods from countries with undervalued currencies. "For far too long, American workers and businesses have been hurt by foreign governments that seek an unfair competitive advantage by undervaluing their currency," Baucus said. "This is a reasonable response to the problems caused when currencies are significantly out of sync with the U.S. dollar."

Credit: National Association Of Manufacturers
Credit: National Association Of Manufacturers

Baucus is referring to one of the two competing bills in the Senate, the Currency Exchange Rate Oversight Reform Act of 2007 (S. 1607). It was introduced by Finance Committee members in June after the Bush Administration declined to brand China a currency manipulator, a designation that could ultimately lead to trade sanctions. In a semiannual report to Congress on foreign exchange rate policies, the Treasury Department acknowledged that the yuan is undervalued, but said it was "unable to determine" that Beijing is deliberately manipulating its currency to gain "an unfair competitive advantage in international trade."

The Finance Committee's measure, whose cosponsors include Democratic presidential candidates Sens. Hillary Rodham Clinton (N.Y.) and Barack Obama (Ill.), would require Treasury to determine whether a country's currency is "fundamentally misaligned," regardless of intent. Countries with misaligned currencies that fail to take corrective action would be subject to a series of increasingly severe penalties. Those include allowing U.S. companies to seek antidumping duties against a targeted country's currency practices, a remedy not allowed under current law. If the country has not reformed its policies after a year, the White House Office of the U.S. Trade Representative would be required to file a complaint at WTO. "The bill gives a good chance for self-correction before penalties ramp up," says Sen. Charles E. Grassley of Iowa, the panel's ranking Republican. "It's a velvet glove with a steel fist inside."

Credit: Courtesy Of Charles Schumer
Credit: Courtesy Of Charles Schumer

To comply with global trade rules, the legislation does not single out any one country, but the target is clear. "The Administration has been too slow in my judgment to act against China's unfair trade practices," says Sen. Charles E. Schumer (D-N.Y.), another key backer of the bill. "They are passing the ball to Congress and saying, 'You do it.' Our objective should be to pass the strongest possible bill we can with the largest possible vote that we can."

The other bill, the Currency Reform & Financial Markets Act of 2007 (S. 1677), was approved by the Senate Banking, Housing & Urban Affairs Committee by a vote of 17 to 4 on Aug. 1. It would make it more difficult for Treasury to avoid formally labeling China a currency manipulator. The bill, sponsored by Chairman Christopher J. Dodd (D-Conn.), another presidential candidate, and ranking member Richard C. Shelby (R-Ala.), would remove the "intent" requirement from the criteria currently needed for Treasury to find that a nation is manipulating its currency.

"Treasury has declined to cite China for manipulation due to a technicality in the law," says Shelby. "By removing the only existing loophole under current law, our bill will force the Administration to avail itself of all of the tools at its disposal in order to provide recourse for American workers and businesses."

Credit: Courtesy Of Christopher Dodd
Credit: Courtesy Of Christopher Dodd

The legislation would require the Treasury Department to examine whether U.S. trading partners have undervalued currencies without having to determine whether the undervaluation is meant to boost exports or foreign reserves. If the department finds manipulation and then bilateral talks fail, it would be required to seek remedies through consultations with the International Monetary Fund or by filing a complaint with WTO.

"A change in our currency manipulation policy is long overdue," Dodd says. "America's companies and workers deserve an opportunity to compete on fair terms with countries such as China, just as we provide market access and fair competition for China and other nations on our soil. We are not asking for a head start here, just a fair race."

Meanwhile, House leaders plan to offer their own bill that business lobbyists expect will draw heavily from several measures already introduced. Reps. Duncan Hunter (R-Calif.) and Tim Ryan (D-Ohio) are the chief sponsors of a widely supported bill that would allow companies to ask the Commerce Department to slap duties on China for currency manipulation.


Another proposal, crafted by Reps. Artur Davis (D-Ala.) and Phillip English (R-Pa.), does not address China's exchange rate practices but would require the Commerce Department to impose tariffs, called countervailing duties, against nonmarket economies like China to offset government subsidies. It also would require congressional approval before the department could lift China's nonmarket-economy status under U.S. trade law.

Rep. Sander M. Levin (D-Mich.), chairman of the House Ways & Means Subcommittee on Trade, says he hopes a bill will be ready for introduction by the end of the year. "There's a real problem with our economic and trade relationship with China," he remarks. "It is vital that we have an active and effective trade policy toward China that ensures they are adhering to the rules of international trade and not manipulating their currency to gain an unfair competitive advantage."

A group of small and medium-sized companies and various labor unions known as the China Currency Coalition has been the driving force behind the legislative effort. "China's insistence on keeping an artificially weak yuan is preventing market forces from acting and is creating dangerous imbalances," says David A. Hartquist, an international trade lawyer and the coalition's counsel.

As a result of currency manipulation, Hartquist says, Chinese goods are frequently priced at less than the cost of the materials contained in the products. "What's needed is legislation that will enable U.S. companies, workers, and farmers—consistent with international law—to defend themselves against the negative impact of undervaluation," he asserts.

Administration officials have pressed lawmakers to avoid a direct confrontation with China, warning that punitive action could trigger a wave of protectionism around the world. The best way to approach China is "through dialogue and engagement, and not necessarily legislation," says Clay Lowery, Treasury's assistant secretary for international affairs.

Last year, the Bush Administration began a new series of high-level talks with the Chinese government aimed at addressing the growing trade tensions between the two nations. Treasury Secretary Henry M. Paulson Jr., the former Goldman Sachs CEO, has relied on mostly diplomatic pressure to persuade China to move to a more market-oriented exchange rate. The centerpiece of that effort is a semiannual meeting known as the U.S.-China "strategic economic dialogue," a process led by Paulson and China's top trade envoy. The next gathering is set for Dec. 12-13 in Beijing.

"We've been supportive of the efforts the Treasury secretary has been making and the successes he's had so far," Dow's Schroeter says. "While people would like to see more, there have already been moves to appreciate the currency. We'd like to see more effort put behind those initiatives so that this happens in a way that's not disruptive either to China's economy or the global system."

With more than 1.3 billion people, Schroeter says, China has huge potential for growth as an export market for U.S. chemical makers. She notes that most of Dow's investments in China, which include 10 manufacturing sites and five business centers, aim to serve the Chinese market. "So there's great opportunity for us to grow as a local exporter but also to bring our technology, our standards, and our environmental practices into the Chinese chemical industry."

Mears says NAM has not taken a position on any of the China currency bills. "We've never believed that the currency value is going to solve the trade deficit with China. It contributes to it, but our deficit is the result of a lot of things. The issue our companies have with China—the low price of Chinese goods—reflects not just currency but also subsidies," she says. In March, the Commerce Department reversed a practice of more than two decades when it decided to levy countervailing duties on imports from China to offset subsidies some Chinese exporters receive from the government. "For a lot of products, subsidies are an even bigger issue than currency," says Mears.

With U.S. national elections approaching and voters upset over soaring trade deficits and the loss of U.S manufacturing jobs, support for legislation targeting China's trade practices is growing. "There is a large percentage of the Congress that feels strongly about this issue," Schroeter says. "When you have a large group like that, they do tend to get things done."

Mears concurs. "I think we do have a very good chance of having China legislation in this Congress. I wouldn't have said that a year ago," she adds. "For some, maybe it is a political statement. For others, I think there's a lot of frustration. This has been an issue for a number of years now."

Whether a China trade bill can muster enough votes to overcome a certain presidential veto is unclear. "It depends on when the bills come to the floor, what China has done recently, and a lot of other variables that will come into play at the time of the vote," Mears says. "But unless there is some kind of significant progress on some of these key issues, I think we are likely to see a veto-proof margin."

While China's currency policy is a concern, Schroeter says Congress would be wise to direct its attention to more pressing matters. "In terms of the real priority issues facing American manufacturing, we see much bigger challenges, such as energy policy, health care reform, and legal reform," she remarks. "These are all areas that we would like to encourage Congress to focus on, as they would have significantly more positive impact on American manufacturing than the valuation of China's currency."


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