Bill might fray China–US ties

  • Global Trends
  • Monday, 04 Oct 2010

The trend towards new protectionism accelerated last week as the US Congress passed a bill to direct the administration to allow easier action against China and other countries found to ‘manipulate’ their currency.

YET another step towards new trade protectionism was taken in the United States last week when the House of Representatives passed a bill enabling the government to raise tariffs of products from countries deemed to have “funda­men­­tally manipulated” their currencies.

The bill is clearly aimed at China, which many in the US Congress and administration believe is deliberately keeping its currency at a low value in order to boost exports. But it does not specifically name China and it could be used also against other countries.

The bill, passed by a vote of 348-79 on Sept 29, will not become law unless it is also passed by the Senate and agreed to by President Barrack Obama. There is speculation that these two other steps are not so likely, and that the House bill is more of a threat in order to increase pressure on China to get the yuan to appreciate much more.

Many American politicians blame the US trade deficit on what they consider a grossly under-valued yuan. The economist Paul Krugman has called for slapping an extra 25% tariff on Chinese products.

With the Congressional elections on Nov 2 approaching, many politicians of both parties have intensified their China-bashing, and Obama also made the Chinese currency his top priority topic when he met Chinese premier Wen Jeibao in New York a fortnight ago.

Currency is the latest in a series of new reasons being prepared to block imports. Last month the steel workers’ union petitioned the US administration to take a case in the WTO against Chinese solar energy and wind energy products on the ground that local companies were getting export subsidies.

Last year, the House of Repre­sentatives passed a climate change related bill that includes a section directing the President to impose border adjustment measures (a financial charge or levy) on selected imports from countries that do not conform to US standards of adequate action to reduce emissions.

China has reacted strongly to the currency bill. A Foreign Ministry spokesperson said China opposed the bill and warned that using the yuan exchange rate to engage in trade protectionism can only harm China-US trade and economic relations and the world economy. And a Commerce Ministry spokesman said that “carrying out anti-subsidy investigations on the basis of currency is against the rules of the WTO.”

An economist at the Chinese Academy of Social Sciences Zhang Xiaojing commented: “It marks a formal step towards a trade war.”

While some US economists blame the Chinese currency, other economists (American and non-American) point out that the United States’ economic problems stem from other more important factors, and that even a large appreciation of the yuan against the dollar would not solve the US problems.

For example, a recent South Centre paper on global economic prospects was sceptical that dollar depreciation against the Chinese currency would address the root cause of the US problem of over-consumption.

It is unlikely to produce significantly faster growth of exports to China. Even if it reduces China’s exports to the US, this may be replaced by imports from other developing countries as long as US consumers continue to live beyond their means.

The paper pointed out that the US has run current account deficits in the past four decades regardless of the strength of the dollar against the currencies of its main trading partners, blaming Germany in the 1970s, Japan in the 1980s and now China.

The bill directs the US Commerce Department to treat “fundamentally undervalued” currencies as an ex­port subsidy, so that action can be taken against the countries’ products.

This is counter to the Department’s practice of rejecting requests to investigate China’s under-valued currency as an export subsidy, on the ground that exporters are not the sole beneficiaries of the “subsidy” complained about (because for example local producers also benefit from the over-valued currency).

The bill thus removes a barrier, and if passed into law, will strengthen complaining US companies’ chances to get counterveiling duties imposed on Chinese products. To succeed, these companies would have to show they have been harmed or face the threat of serious harm by imports from the countries being blamed.

The bill defines a currency as being “fundamentally undervalued” if the government has engaged in protracted, large-scale currency intervention in a foreign exchange market during an 18-month period; if the real effective exchange rate is undervalued by at least 5% over the period; if the country has had significant and persistent current account surpluses during the period; and if the foreign reserves held by the government during the period exceeds the amount necessary to repay its debt obligations within the next 12 months, exceeds 20% of the country’s money supply and exceeds the value of the country’s imports during the previous four months.

If action is taken under this bill, a key question would be whether it is compatible with the WTO’s laws. The bill’s advocates claim that it is but China thinks otherwise. Whatever a WTO panel may decide in a future case, such an action would cause enormous damage to China-US economic relations.

Premier Wen recently defended his country’s currency policy, pointing out that the yuan had appreciated by a massive 55.2% from January 1994 to July 2010. Saying that the yuan had seen increased flexibility since June when China launched further reforms of the yuan exchange rate mechanism, he added that China was still facing great difficulties and there was no basis for drastic appreciation.

The obsessive conviction by US politicians that their country’s economy’s woes are caused by China and specifically its currency, and the serious problems on the ground in China that would be caused by an appreciation of the yuan are two factors that make the successful resolution of the US-China standoff difficult. This explains the dangers of new and growing protectionism in the US and the angry response in China. Hopefully the House bill in the US will not progress into law and subsequent action. But it may, and we should brace for tough times ahead.

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