October 4, 2011
Every six months, the Treasury issues a report declaring that China’s currency is undervalued, draining dollars and jobs out of the U.S. economy. And every six months, the Treasury defers action, saying the Beijing government is not manipulating its currency.
But with the prolonged slump in jobs, pressure is mounting among American politicians — as well as those in Europe, Brazil and emerging markets — to challenge China, even if that means imposing import tariffs to protect domestic industries and jobs.
The Senate voted 79 to 19 on Monday to bring to the floor a currency measure that would make it more difficult for the Treasury and Commerce departments to sidestep the need to retaliate against countries such as China. A similar bill passed the House by a large margin last year, and congressional leaders give the new measure a strong chance of passage, potentially putting both China and the Obama administration in an awkward position.
Congress is taking aim at China’s currency just as lawmakers appear to be uniting behind free-trade agreements with Panama, South Korea and Colombia. President Obama sent those deals to Congress on Monday, after House Speaker John A. Boehner (R-Ohio) pledged to swiftly move them, together with a worker retraining program the White House wants.
Obama said the trade deals “will make it easier for American companies to sell their products . . . and provide a major boost to our exports.” He said they would “support tens of thousands of jobs across the country for workers making products stamped with three proud words: Made in America.”
Obama said the South Korea deal would phase out its tariffs on 95 percent of U.S. exports over five years and give American automakers greater access to the South Korean market. He said two-thirds of U.S. agricultural products would also enter South Korea duty-free.
Yet China’s weak currency continues to loom over the U.S. trade debate. Economists say that even though China has gradually let the value of its currency rise over the past six years, the Chinese yuan is still undervalued by anywhere from 15 percent to 38.5 percent. They say that is costing the U.S. economy anywhere from a half-million to 2.25 million jobs. Although the Obama administration has been urging China to let its currency rise faster, China has been slow to respond, and the administration has avoided a full-fledged confrontation spiked with retaliatory tariffs.
“I regard China’s currency policy as the most protectionist measure taken by any major country since World War II,” said C. Fred Bergsten, head of the Peterson Institute for International Economics. “Its currency manipulation by our estimates has it undervalued by 20 percent to 30 percent. That’s equivalent to a 20 to 30 percent subsidy on all exports and a tariff on all imports by the largest trading country in the world.”
Republican presidential candidates, sensing which way the political winds are blowing, also are starting to line up in support of measures to push China into letting its currency increase in value. Former Massachusetts governor Mitt Romney said he would declare China a currency manipulator, which could lead to tariffs on Chinese imports.
Even Jon Huntsman Jr., who served as Obama’s ambassador to China, said he would sign the Senate bill if he were president, though he added in a Fox News interview that “it will carry very little meaning at the end of the day. China will devalue its currency. It has for the last year to two years, and it will continue to. Why? Because it’s in their interest.”
Leaders of other countries are feeling similar pressures. In Brazil, where China has been pursuing broad economic engagement, Finance Minister Guido Mantega has taken a variety of measures to combat imports, mostly from China. Brazil changed government procurement rules to favor locally made products. It boosted by 30 percentage points a tax on imported cars, which have been gaining market share. And it revived an old law restricting the amount of farmland that foreigners can purchase.
Brazil cannot “allow our auto industry to be taken over by upstarts who are coming in from outside,” Mantega said, according to the Agence France-Presse news agency.
Robert E. Scott, an economist and director of trade research at the Economic Policy Institute, said China’s currency rate not only hurts U.S. exports to China, but also makes it more difficult for U.S. companies to compete with Chinese firms for sales in Europe and emerging markets.
He cited passenger jetliners as an example. China has unveiled plans to export its jets starting in 2016. He said a full revaluation by China would make exported Boeing jets a third less expensive by comparison.
Scott said that most of the improvement in the U.S. trade balance would “come from an increase in U.S. exports to the rest of world because China is now our number one competitor.” He said the boost in U.S. jobs would also cut the budget deficit by $850 billion over 10 years as more jobs bring in higher tax revenue and fewer people draw unemployment benefits.
Bergsten said China is intervening in currency markets with “the sole motive” of keeping the value of its currency low and its exports cheap. “It’s probably more protectionist than [the] Smoot-Hawley tariff,” he said, referring to the U.S. trade barrier that is widely thought to have worsened the Great Depression.
The Senate bill — whose 20 sponsors include Sens. Sherrod Brown (D-Ohio), Charles E. Schumer (D-N.Y.), Lindsey O. Graham (R-S.C.) and Olympia J. Snowe (R-Maine) — would remove the question of intent and trigger retaliatory tariffs if Treasury finds any country’s currency to be “misaligned.”
It also alters the criteria the Commerce Department uses when U.S. companies seek countervailing duties on imports because a country’s currency is artificially low. Currently, the department considers countervailing duties when a country targets a specific industry or product, such as steel or rubber tires.
Brian Fallon, a spokesman for Schumer, said the senator’s goal was “to level the playing field. We object to the idea that this is a protectionist measure.”