US

US Congress ramps up pressure on China over currency

By Chen Weihua and Ariel Tung (China Daily)
Updated: 2010-09-30 10:45

House passes bill aimed at forcing an increase in the yuan's value

NEW YORK - The United States House of Representatives on Wednesday passed a bill aimed at punishing China for its foreign currency practice.

The bill was voted 348 for and 79 against at the ballot cast at 5:57 pm. It was the first time the House passed such a bill, after years of debate, aimed at forcing China to let its currency appreciate.

The measure still needs approval from the Senate and endorsement by US President Barack Obama for it to become law.

Senate Majority Leader Harry Reid, a Democrat from Nevada, said he has not decided whether to take up the currency bill after the mid-term elections on Nov 2.

If passed, the legislation will allow the US to use estimates of currency undervaluation to calculate countervailing duties on imports from China and other countries.

It would let US companies lodge trade complaints against importers of products that benefit from an undervalued Chinese currency, which gives Chinese exporters an advantage over competitors from other countries.

A US Congressional Budget Office report on Tuesday said the effects of those cases would be limited because the US dollar is likely to fall in value and many producers of goods competing with Chinese imports have left the US.

Obama, at a town hall-style meeting in Des Moines, Iowa, on Wednesday, said he is pushing China over its currency because the Chinese currency is undervalued.

"People generally think they are managing their currency in a way that makes our goods more expensive to sell there and their goods cheaper to sell here," Obama said, adding that the resulting imbalance was a major factor contributing to the US trade deficit.

Experts said the aggressive measures will not help reduce the trade deficit with China while the measures may be counterproductive and lead to retaliation from China.

Eswar Prasad, Tolani senior professor of trade policy at Cornell University and former chief of the financial studies division in the IMF's Research Department, told China Daily the bill indicates an escalation from just rhetoric to more substantive action.

"Whatever the eventual outcome of the legislative process, this raises the stakes on both sides and increases the risks of retaliatory trade sanctions," he said.

"There is a great deal at stake for both sides in maintaining a stable relationship so it is likely that leaders of the two countries will avert a full-blown trade war. But the domestic policy complications on both sides will keep this issue simmering as neither side wants to back down.

"A trade war would hurt both sides. The US is an important market. So losing access to part of that market would certainly not be good for China.

"The problem for the US is that a trade war with China could have a negative impact on trade negotiations worldwide and could potentially limit the US momentum to increase market access in other countries as well."

Prasad said this would make it even harder to achieve Obama's already ambitious goal of doubling US exports in five years.

Yukon Huang, senior associate at Carnegie Endowment and a former World Bank director for China, does not think it will be a big issue.

"China realizes this kind of action is influenced by elections and politics in the US. It's waiting for politics to cool off first," he said.

"China probably realizes that it should not deal with more serious problems in this politically heated environment.

"Passing the bill won't benefit the US or Chinese economy. This kind of action does not help or contribute to the situation."

Stephen Roach, a senior fellow at the Jackson Institute for Global Affairs at Yale University and non-executive chairman of Morgan Stanley Asia, warned the administration that forcing such a currency realignment would be a blunder of historic proportions.

Roach, who met Chinese Premier Wen Jiabao in New York last week, believes a win-win solution would be for China to take pro-consumption initiatives.

Among these would be expanding the social safety net, providing major support for rural incomes through tax policy and land reform as well as enhanced initiatives to encourage rural urban migration, and encouraging the creation of service-oriented jobs in industries such as retail and wholesale trade, domestic transportation, leisure and hospitality.

In his article on New York Times on Wednesday, Roach said any increase in Chinese consumption would offer a potentially powerful opportunity for US-made goods and services.

Roach believes China bashers are blind to the critical points.

"The Congress has opted for the low road of misdirected currency bashing. China should take the high road by providing immediate and long-overdue stimulus to private consumption," he wrote.

Also on Wednesday, Martin Wolf, chief economics commentator of Financial Times, wrote that it is not hard to see China's point of view: It is desperate to avoid what it views as the fate of Japan after the Plaza Accord.

"With export competitiveness damaged by its soaring currency and pressured by the US to reduce its current account surplus, Japan chose not the needed structural reforms, but a huge monetary expansion, instead," he said.

The consequent bubble helped deliver the "lost decade" of the 1990s. Once a world-beater, Japan fell into the doldrums. For China, any such outcome would be a catastrophe, Wolf said.

Obama also raised the currency issue with Wen during their meeting at the United Nations a week ago. But analysts believe the Obama administration, which has not taken a position on the legislation, would prefer to engage China to persuade it to appreciate its currency to appease protests from unions and small manufacturers.

A day before meeting Obama, Wen said that a 20 percent increase in the currency's value would cause severe job losses and trigger social instability in China.

"We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs," he said.

China Daily