China Currency Row

As Congress returns to Washington, D.C., after the midterm elections, Senate Democrats have vowed to take up legislation that could lead to punitive tariffs on a broad range of Chinese imports.

But business groups representing manufacturing and high-tech companies with sizable holdings in China warn that a growing desire to punish the Asian giant over its allegedly undervalued currency could spark a trade war between the world’s two biggest economies and put at risk thousands of U.S. jobs.

“China’s exchange rate should better reflect market influences from trade flows,” says John Frisbie, president of the U.S.-China Business Council, an organization of roughly 220 U.S. companies that do business with China. “Counterproductive tariff legislation is just the wrong way to get to that goal and will do more harm than good.”

Council members include major chemical and pharmaceutical companies such as Dow Chemical, DuPont, Eastman Chemical, Pfizer, Merck & Co., and GlaxoSmithKline.

In a rare show of bipartisan support, the House of Representatives in late September overwhelmingly voted in favor of the Currency Reform for Fair Trade Act (H.R. 2378). The bill would allow the Commerce Department to impose punitive tariffs on goods imported from countries deemed to have currencies that are “fundamentally undervalued.” Although it applies to any country, China is clearly the number one target.

The legislation follows years of lawmaker complaints that China is keeping its currency, the renminbi, artificially low against the dollar, which gives Chinese exporters an unfair advantage against U.S. manufacturers in trade. “If this risks upsetting the People’s Republic of China, so be it,” Rep. Timothy Ryan (D-Ohio), a lead cosponsor of the bill, remarked during floor debate on the measure prior to the 348-79 vote on Sept. 29.

The U.S. trade deficit with China widened to $145 billion in the first seven months of this year, up from $123 billion for the same period in 2009. Public concern about persistent high unemployment and jobs lost to foreign competition has added to support for the bill, which has been under discussion since 2005.

“It’s hard to see how it makes good sense to ‘send a message to China’ by punishing ourselves with taxes on American households and lost export opportunities for manufacturers and farmers if China retaliates,” Frisbie says. “We need to come up with an approach that gets the job done, not pursue divisive tariffs that hurt a broad group of Americans while protecting the narrow interests that support this bill.”

The legislation is strongly backed by labor unions. “We’re in a trade war with China, and we’re losing,” says Richard L. Trumka, president of the AFL-CIO, the nation’s largest labor federation. The Chinese government, he says, has been keeping the renminbi undervalued by about 40% as a deliberate and central plank of its export strategy.

“That’s a 40% subsidy for their products and a 40% tax on products we try to send there,” Trumka says. “Our dollars stimulate another nation’s economy while we rack up unsustainable trade deficits at home.”

The expanding trade deficit between the U.S. and China eliminated or displaced an estimated 2.4 million jobs in the U.S. between 2001 and 2008, according to a report published earlier this year by the Economic Policy Institute (EPI), a nonpartisan think tank.

“We have allowed the Chinese government to game the system for far too long, with serious consequences for the U.S. economy,” says EPI economist Robert E. Scott, the report’s author. The Treasury Department should publicly declare China to be a currency manipulator, and Congress should authorize tariffs of at least 25% “if China doesn’t start playing by fair rules,” he asserts.

The business community generally agrees that China has kept its currency undervalued. But “virtually every nation targets its currency” to gain a competitive advantage, says T. Kevin Swift, chief economist at the American Chemistry Council, an industry group that represents the nation’s largest chemical manufacturers.

“All a punitive tariff does is invite retaliation on the other side,” Swift says. Rising protectionism “very well could derail any economic recovery,” he adds. “We have an economy that is more dependent upon trade than it was a generation ago. A larger share of GDP [gross domestic product] is exported.”

The so-called China currency bill approved by the House “is right out of Smoot-Hawley,” Swift says, referring to the infamous tariff legislation Congress passed in 1930 that many economists believe contributed to the severity of the Great Depression.

The law named after Sen. Reed Smoot (R-Utah) and Rep. Willis C. Hawley (R-Ore.) raised U.S. tariffs on more than 20,000 imported goods to record levels and set off a round of retaliatory actions around the world. Over three years, U.S. trade with its main partners fell 68%. That helped turn what might have been a normal recession into the Great Depression, with a 30% drop in GDP and joblessness of 25%. “We certainly don’t need another round of that,” Swift remarks.

If the China currency bill were to be enacted into law, the historically free-trade-oriented chemical industry could be a target of Chinese retaliation. Despite the overall U.S. trade deficit with China, America’s chemical manufacturers enjoy a $1.9 billion trade surplus with China, up from $588 million a decade ago.

About 12,000 chemical industry jobs depend on U.S. exports to China, according to Swift. “And because we supply inputs to a lot of other industries that export to China, there’s probably an additional 6,500 jobs that are dependent upon U.S. exports to China,” he notes.

Sen. Charles E. Schumer (D-N.Y.), who has introduced a similar, but not identical, currency bill (S. 3134) in the Senate, has pledged to press for a floor vote during the lame-duck session. “We must take decisive action against China’s currency manipulation and other economically injurious behavior,” Schumer says in a statement. The issue “is not U.S. protectionism,” he says, “but China’s flouting of the rules of free trade."

His legislation would provide less flexibility to the Treasury Department when it comes to citing countries for currency manipulation. It would also impose stiff new penalties on designated countries, including tariffs on the countries’ exports and a ban on any companies from those countries receiving U.S. government contracts.

“This issue cannot wait for another year or for a new Congress,” Schumer says. “This is not about China bashing; it’s about de­fend­ing the U.S. I am confident that this bill will pass the Senate with overwhelming support.”

A Chinese Foreign Ministry spokeswoman says her government is “resolutely opposed” to the U.S. legislation. “Using the renminbi exchange rate issue as an excuse to engage in protectionism against China can only harm China-U.S. trade and economic relations and will have a negative effect on both countries’ economies and the world economy,” Jiang Yu says.

Over the summer, China’s government announced that it would allow its currency to follow market trends, but the renminbi has increased in value only slightly.

President Barack Obama and President Hu Jintao of China were expected to discuss the balance of trade between the two countries as well as U.S. and global concern about the valuation of China’s currency during a one-on-one meeting on Nov. 11 at the Group of 20 summit in South Korea.