(Caroline Baum, author of "Just What I Said," is a columnist for
Bloomberg News. The opinions expressed are her own)
U.S. President George W. Bush (C) and U.S. Secretary of
Treasury Henry Paulson (R) welcome Chinese Vice Premier Wu Yi to the
Eisenhower Executive Office Building in the White House complex before a
meeting of the U.S.-China Strategic Economic Dialogue in Washington, May
24, 2007. [Reuters]
China may not qualify as a currency manipulator, according to the terms set
out in Section 304 of the Omnibus Trade and Competitiveness Act of 1988. Not to
worry: The U.S. Congress is happy to fill those shoes.
In its semiannual report on International and Exchange Rate Policies last
week, the U.S. Treasury declined to tag China, which manages its currency, the
yuan, to the dollar, with a scarlet "M."
"Treasury was unable to determine that China's exchange rate policy was
carried out for the purpose of preventing effective balance of payments
adjustment or gaining unfair competitive advantage in international trade,"
according to the report.
Was unable to determine or didn't see the
On the same day that Treasury was punting on name calling -- preferring,
instead, a Strategic Economic Dialogue between the two countries -- four U.S.
senators picked up the ball, introducing legislation that would make it easier
for American companies to seek redress under anti-dumping laws.
"For too long our currency policy has left American workers and businesses
unprotected from foreign governments seeking an unfair financial advantage,"
said Senate Finance Committee Chairman Max Baucus, Democrat of Montana, one of
the bill's sponsors.
In case the good senator hasn't noticed in his 32 years in Congress, the U.S.
has no currency policy. And as for getting China to adopt a more flexible
exchange rate, anything Congress does will probably be counterproductive.
Sovereign nations don't like to be seen caving in to pressure from other
"What country has changed as much as China in the last 30 years in terms of
opening its markets?" said Dan Griswold, director of the Cato Institute's Center
for Trade Policy Studies in Washington. "And how much has the U.S. benefited?
The whole debate is based on a false notion of mercantilism. You can't realize
real gains through currency manipulation."
In the Asian financial crisis in 1997, "some currencies practically dropped
40 percent overnight," Griswold said. "It didn't create prosperity."
China was singled out and praised for maintaining its peg to the U.S. dollar.
Two of the other sponsors of the Currency Exchange Rate Oversight bill,
Republican Lindsey Graham of South Carolina and Democrat Chuck Schumer of New
York, are back for their second China go-round. Last year, the duo sponsored
legislation that would have slapped tariffs of 27.5 percent on Chinese imports.
They withdrew the bill when it became clear that it wasn't compliant with World
Trade Organization rules.
"Our previous legislation got China's attention," Schumer boasted at a June
13 press conference. "The purpose of this legislation is to require them to
Schumer's "elegant solution" to the China conundrum involves identifying
"fundamentally misaligned currencies" for "priority action" in 180 and 360 days
if the misaligned country fails to adopt "appropriate policies" to realign
itself. The final step would require the Treasury and Federal Reserve Board to
consult with other central banks and consider "remedial intervention in currency
As a practical matter, how would that work? Schumer's elegant solution seems
to have some inelegant operational difficulties. For example, how exactly would
the Fed sell dollars and buy yuan, a currency that isn't freely traded in the
Policy or Politics?
Graham's protectionist motivations derive from the fact that South Carolina
competes, so to speak, with China in textile and apparel manufacturing. At the
top echelons of that competition is billionaire Roger Milliken, head of a
multinational textile empire based in Spartanburg and a major Graham supporter.
It wouldn't be a huge leap to assume a connection between Milliken's
contributions and Graham's trade positions.
Critics of China's currency-management policy claim the yuan is undervalued
by as much as 40 percent, giving the country's exports a competitive advantage.
You never hear much about the disadvantages, about China paying artificially
inflated prices for the capital goods and intermediate materials it imports. It
overpays for vast amounts of raw materials, everything from oil to copper to
At the same time, do American consumers want to pay 40 percent more for
underwear and other low-end apparel from China? (China's lost market share would
be other emerging countries' gain, but it would still mean higher import prices
League of Its Own
China still has a long way to go to reform its domestic financial system and
move from a managed to a flexible exchange rate. Because it lacks developed
capital markets and a monetary policy of its own, China has to resort to various
administrative measures to manage its booming economy.
The People's Bank of China raised its one-year benchmark rate by 100 basis
points in the last two years, hardly an onerous increase in an economy that
continues to barrel ahead at 11 percent. It increased reserve requirements five
times this year.
In addition, China cut tax breaks for exporters, imposed limits on
real-estate investment and land use, implemented environmental controls and
tripled the stock transfer tax.
Change doesn't happen overnight, especially in a country impoverished by
decades of state control of the economy. Congress seems to have run out of time.
Schumer said there's broad bipartisan support for the currency bill in the
House and the Senate, and he expects it to pass with a veto-proof majority.
"A large number of people in both parties got the China issue wrong,"
Griswold said. "To intentionally weaken the dollar to gain some illusory trade
advantage is a fool's errand."
Now there's a challenge Congress won't be able to resist.
(Special courtesy to Bloomberg News)