This Week: US Senate's China Bill

♠ Posted by Emmanuel in , at 6/12/2007 02:34:00 AM
[NOTE: The bill is set to be unveiled on Wednesday--see below.] To me, the Senate currency bill as described in this Financial Times article sounds a bit watered down compared to what was originally described by Max Baucus. However, this bill should still send a clear message to China that the West is fast becoming impatient with its perceived undervaluation of the yuan as even the EU has become anxious over the matter. I have been curious as to who would lose out the most in the event of a trade war--China with its less-than-stellar local demand or Western countries that have grown accustomed to plentiful, inexpensive Chinese goods. Also, I am still unclear on how this bill would function, especially as it aims to be "WTO legal" (see the Max Baucus link again). It seems we might not have to wonder for very long at this rate:

A bill will be introduced in the US Senate this week that intends to increase pressure on China to float its currency but avoid action that would violate international trade rules, according topeople close to the process.

The legislation is viewed by the Bush administration as the best chance for Congress to let off some steam without blowing a hole in relations with Beijing.

The Senate bill is more moderate than alternatives being floated on Capitol Hill, but will still create headaches for the administration and could become a dividing issue in the next election.

"We don't have any tools to forestall the potential legislation coming down the tracks," said James Baker, former US secretary of state, in a speech on US-China relations.

Lawmakers argue China's weak currency unfairly subsidises the country's exports and contributes to a record annual bilateral US trade deficit of $233bn (€174bn; £118bn). Beijing says it wants to shift the economy towards consumer-driven growth, but fears instability if it moves too quickly.

The Senate bill will serve to step up the pressure after unsuccessful attempts by Hank Paulson, US Treasury secretary, to persuade Beijing to accelerate reform.

The legislation is not expected explicitly to take issue with China's exchange rate. Instead, it is likely to deal broadly with undervalued currencies and set out a series of escalating steps for the US to take.

It is expected to require the US Treasury secretary to report regularly on "misaligned" currencies and call for Susan Schwab, US trade representative, to beef up enforcement of remedy laws...

Senate leaders were understood to be resisting adding radical measures suggested by some lawmakers, such as unilateral tariffs. But the legislation will still go further than the Bush administration had originally hoped.

A novel proposal that has gained traction places emphasis on trade law. This move would force the issue of undervalued currencies into the path of the World Trade Organisation.

UPDATE 1: MarketWatch says that the bill will be unveiled shortly after the US Treasury presents its semiannual report on currencies to Congress this Wednesday (for dramatic effect?) Is this another small step in the escalation of US-China trade tensions or the harbinger of a lock up your daughters and run for the hills epoch-making event? We'll see; it won't be long now...

Four U.S. senators will unveil a new bill Wednesday that takes aim at "misaligned" currency policies that harm U.S. trade and economic interests, the Senate Finance Committee said Monday.

Details of the bill will be released at 1:30 p.m. Eastern time on Wednesday, hours after the U.S. Treasury makes its semiannual report about currencies to Congress. The Bush administration has been under pressure from lawmakers and manufacturers to label China a manipulator of its currency, the yuan.

Senators involved in the bill, including Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C., have been vocal opponents of China's currency policy, which they say undervalues the yuan and hurts U.S. workers.

Also behind the bill are Senate Finance Committee Chairman Max Baucus, a Montana Democrat, and the committee's top Republican, Charles Grassley of Iowa.

The committee said the bill will address the necessary U.S. response to the undervaluing of currencies by foreign countries including China.

"Fundamentally misaligned currencies distort global markets and put U.S. manufacturers and farmers at a competitive disadvantage," said a Finance Committee press release.

The bill and the Treasury report come shortly after Beijing decided to widen the yuan's trading band against the dollar.

But it also follows two days of talks between U.S. and Chinese officials in late May that yielded no progress on reforming China's foreign exchange policy.

In the last Congress, the four senators tried to pass bills addressing currency problems and agreed to craft a consensus bill during this legislative session.

UPDATE 2: The US Treasury is unlikely to declare China a currency manipulator yet again and press for faster action on yuan revaluation. Talk about setting the perfect stage for Grassley-Baucus-Schumer-Graham. If I were the Chinese, I'd be getting ready to unload some Treasuries right about now in retaliation, though I suspect the Chinese might have cooler minds...

The Bush administration does not need additional legislation to prod China to move faster to reform its currency exchange-rate policies, a senior Treasury Department official said on Monday.

"We believe that we currently have the tools to effectively address these issues, the issue with respect to the exchange rate," said Alan Holmer, the Treasury department's special envoy to China.

Holmer declined to say whether Treasury would formally label China a currency manipulator in a semiannual report of foreign exchange practices of key trade partners due out on Wednesday.

But he said the administration took the issue of China's currency practices "very seriously" and was making an unprecedented push for faster reform by Beijing.

UPDATE 3: I spoke too soon, perhaps. China is now threatening retaliation if the Senate bill could lead to higher tariffs on Chinese goods which the bill will likely include provisions for. The stakes have been upped, my friends. From Agence France Presse:

China warned Tuesday of unspecified countermeasures if the US Congress adopts a bill on Beijing's foreign exchange regime that could lead to higher US tariffs on Chinese imports.

"China has all along held that the development of Sino-US bilateral trade is in the interest of both sides," foreign ministry spokesman Qin Gang told reporters.

But "the US Congress could pass this legislation which will lead to the problem of higher tariffs on Chinese goods... If this happens then the Chinese departments concerned will make a response..."

Despite heavy US dependence on imports from China, some lawmakers want trade sanctions, including a possible 20 percent across-the-board tariff on Chinese goods.

"Fundamentally misaligned currencies distort global markets and put US manufacturers and farmers at a competitive disadvantage," said a statement by the Senate finance panel, which has jurisdiction over US trade policy.

Qin disputed this on Tuesday, asking: "Is the yuan high or low? The US Congress says it is high, but whose standard is this? It is the US standard," he said.

He said that China would listen to US complaints on the yuan and seek to appropriately resolve trade disputes but insisted that Washington had no right to determine the value of the Chinese currency.

"The (yuan) exchange rate should be conducive to China's current conditions and should be in the interests of China's economic development and global economic development," Qin said.

"The reform of the yuan exchange rate is ongoing and is dependent on market demand and supply."

He said trade disputes needed to be solved as Sino-US economic and trade cooperation continued to develop, "by taking into consideration the concerns of the other."

"We must especially not politicise economic and trade issues. We also must not take the concerned issues, especially American domestic issues and transfer them into the Sino-US bilateral economic and trade relationship," he said.

Qin made the announcement a day after China announced its May trade surplus surged nearly 73 percent from a year earlier to 22.45 billion dollars.

It set China on course for a massive surplus for all of 2007 despite a series of measures by the government to cool exports and thereby ease tensions with the United States and its other major trading partners.

Based on current trends, the surplus could this year surpass 320 billion dollars, 10 times more than the level in 2004, London-based Capital Economics said.

UPDATE 4: This should be the final update until this bill hits the newswire. MarketWatch notes that the US is not only considering its economic (read: trade) relations with China but also a host of other international relations matters such as North Korea, Iran, and Taiwan where it needs Chinese cooperation. Nevertheless, the Senate is irretrievably hot to trot on this issue:

On Wednesday, a bipartisan group of four U.S. senators will unveil new consequences in a bill that takes aim at "misaligned" currency policies that harm U.S. trade and economic interests, and experts say that it's likely to pass in some fashion.

Indeed, analysts said that there was a good chance the legislation could pass Congress with a veto-proof majority, forcing the Bush administration to negotiate seriously on the issue.

"I think a bill would pass Congress in a heartbeat," said Gary Hufbauer, a former Treasury Department official and now an analyst at the Peter G. Peterson Institute for International Economics.

"There is an embarrassment of sponsors in both parties and both houses who want to see their name affixed to the China bill," he added.

The legislation -- details of which are being closely held -- is expected to be a watered-down version of the across-the-board 27.5% tariff that would have been slapped on Chinese imports in a previous version, unless the country allowed its currency to appreciate.

Experts expect the new bill to urge Treasury to press the International Monetary Fund to decide that China is a manipulator.

The bill may also include some WTO action, calling upon the U.S. trade representative to file a case with the international trade body against China's currency.

In addition, the bill may allow some counterveiling [sic] or antidumping duties on Chinese imports.

During the three years or so it would take the WTO decide whether these duties were legal, Chinese importers would be forced to pay to fines. Even if the WTO eventually ruled that the duties were illegal, those collected fines would not have to be returned.

Earlier Wednesday morning, the Treasury will make its semiannual report about currencies to Congress. There is not much drama expected as experts said that the Bush administration will once again shy away from calling China a manipulator of its currency.

Treasury Secretary Henry Paulson clearly has expressed greater displeasure that China has not moved on the currency, but has made no hints that he is willing to formally label China a manipulator.

"My guess is that language in the report is going to be stronger, but I think they will again stop short of calling them a currency manipulator. I think that that will be too far for the administration to go," said Desmond Lachman, an analyst at the American Enterprise Institute.

The White House needs China's help with North Korea, Iran and even Taiwan.

"They are not just viewing it purely through the prism of economics. I think they are reluctant to get into a real showdown with China," Lachman added.

A formal manipulator label would set in motion a process that would lead to bilateral talks on the currency issue. But it would also be seen as a green light in Congress to pass harsh legislation limiting Chinese imports to the United States.

But the Chinese have made it easy for the bad cops to gain traction, according to analysts. Very little progress was made during the recent top-level talks last month between Chinese economic leaders and members of the Bush administration under the framework of the Strategic Economic Dialogue.

"I found the Chinese amazingly unyielding. They gave Paulson nothing," commented Lachman.

Ashraf Laidi, chief foreign-exchange analyst with CMC Markets, said that the dollar could come under broad selling pressure on Wednesday afternoon when the details of the legislation are expected to be unveiled.