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    China Business
     Mar 31, 2006
Schumer-Graham 'nuke' holstered
By Frederick W Stakelbeck Jr

US Senators Charles Schumer, a Democrat from New York, and Lindsey Graham, a Republican from South Carolina, traveled to China last week to discuss recently strained US-China trade relations. Allegations by the United States that China has deliberately suppressed the value of its currency, the yuan, to make its exports cheaper and imports more expensive continue to present significant diplomatic hurdles for both countries.

Massive US trade deficits with China have become a growing concern for the administration of President George W Bush and

the US Congress. In 2005, the US trade deficit with China ballooned to more than US$200 billion, or 27% of the total US trade deficit. US consumers devoured low-cost goods made in China at a record pace, even as the US economy showed mixed overall performance.

To address the concerns of the White House and Congress regarding China's currency, Schumer and Graham introduced a bill last year that would assess a 27.5% tariff on all Chinese goods arriving in the US within two years, unless Beijing allowed more flexibility in the yuan. "We are not going to give up until we see a plan," Schumer noted in Beijing.

As the China trip wore on, differences in opinion between Schumer and Graham regarding an appropriate US response to the currency issue became apparent. Schumer commented that he came away from the talks with Chinese officials encouraged and more likely to listen to calls for postponement of the pending congressional bill. Saying his views on China's trade and monetary policy had evolved during his visit, Schumer noted that the Chinese were taking positive steps: "I'm convinced they do want to get there [market-based currency adjustments], which I wasn't a week ago."

Unlike Schumer, Graham remained committed to legislative intervention as a way to address the currency differences. "I'm more sensitive now than I was before about how hard it would be to move toward a floating currency, but I am more committed than ever to make sure it occurs," noted Graham.

But after returning to Washington and conferring with Treasury Secretary John Snow and other officials, the two senators said on Tuesday that they would delay any vote on the tariff bill for another six months, while still refusing to withdraw it entirely.

Announcing the decision in his characteristically colorful style, Schumer said, "We come back from China feeling very good ... we believe if we hadn't introduced this strong medicine, nothing ever would have happened. But we also believe that now that we're on the path to progress, we don't have to fire this so-called nuclear weapon, but can hold it in abeyance as we carefully watch and wait and expect continued progress."

Graham, striking a slightly more cautious note, said: "The 3% revaluation since our bill was introduced is a good start, but I'm not totally convinced it represents real reform ... I'm willing to abandon the need for tariffs if the Chinese embark on real reform. We're not there yet."

Critics of Beijing's existing currency policy note that an artificially low yuan has allowed China's overall trade surplus to explode, reaching $102 billion in 2005. Some leading global economists have estimated that this year's trade surplus will reach between $100 billion and $110 billion. A surplus this year would contribute to China's enormous foreign-exchange reserves, pushing them well over the $1 trillion mark and past the current world leader, Japan.

Standard Chartered senior economist Stephen Green said in Beijing this week that China is manipulating its currency. "It's true that China is manipulating its currency, but it's also true it's manipulating it in order to appreciate against the dollar. If it was following the basket [currencies such as the dollar, euro and yen used as a reference point] in recent weeks, it would actually be depreciating against the dollar," Green said.

(When China initially revalued its currency upward last July, it committed itself to valuing the yuan against a basket of currencies. However, since the composition of the basket was never precisely defined, at least publicly, it is extremely difficult for outsiders to assess whether China is actually following the policy or not.)

Snow has also placed increasing pressure on Beijing to take action before President Hu Jintao's April visit to Washington, threatening that Beijing could be labeled a "currency manipulator" if it failed to take corrective action.

In response to ongoing concerns expressed by Washington related to its currency, Beijing announced a revaluation of the yuan of 2.1% last July, with the currency fluctuating upward about 1% over the past eight months. Although the currency adjustments have been welcomed by the US, they have been made at a pace determined solely by Beijing. This has troubled some foreign economists, who view a pre-sanctioned, incremental revaluation of the yuan as the only remedy to ongoing trade imbalances.

But at the opening of parliament's annual session this month, Premier Wen Jiabao gave no indication that China would yield to international pressure to ease exchange-rate controls. Moreover, a February report by the People's Bank of China, the country's central bank, noted only that the yuan would be kept "relatively stable" for the remainder of this year.

Song Guoqing, a professor of economics at Peking University, said in February that China will not be influenced by political considerations when making economic policy decisions: "Steady growth of the domestic economy and the interests of the whole society are the main things that Chinese leaders will weigh as they make their [exchange-rate] decision."

Opponents of the pending Schumer-Graham bill say that if Congress passes the legislation, poor US citizens would be hurt the most, since Chinese products would become more expensive. In addition, opponents' claim that millions of Chinese workers who make products shipped to the US would be immediately affected, slowing the pace of economic reforms in the country. Beijing has also said it is worried that such action will create a premature "big bang" on its emerging financial markets.

So the US Congress finds itself in a delicate foreign-policy position - trying to satisfy calls at home for currency adjustments to the yuan while at the same time fostering a mutually beneficial US-China trade partnership that will help both US businesses and consumers. For its part, Beijing also has policy decisions to make. It must demonstrate a willingness to be flexible with its currency, while also reassuring its trade partners that it understands the impact of its currency decisions on others.

The current Schumer-Graham bill is not the only possible answer to the US-China currency dispute. Senator Charles Grassley, an Iowa Republican and chairman of the Senate Finance Committee, has already called for both senators to table the existing bill and to reject calls for imposing tariffs on Chinese imports.

Significantly, Grassley and another senator, Montana Democrat Max Baucus, have introduced a competing trade bill that has been seen as a more subtle, procedural way of achieving the same end sought by Schumer and Graham. The Grassley-Baucus bill would, among other stipulations, require the Treasury Department to work with the International Monetary Fund to resolve major currency imbalances. Various measures, including a cutoff of US government loan guarantees and government-backed development bank lending, could be enacted if countries named under the legislation fail to resolve their alleged currency manipulation.

Washington analysts say that the Grassley-Baucus bill, in some form, is likely to pass eventually and become the basis for a new policy to deal with currency imbalances. Charles Freeman, managing director of the China Alliance and the former top trade official dealing with China, said that "some air needs to be let out of the balloon, and [Grassley-Baucus] may be the way to do it ... even Schumer would like to have something to vote on other than the Schumer bill".

As for the Schumer-Graham legislation, after the decision to delay any vote until September, there seems almost no chance of any disruption of President Hu Jintao's April White House visit, and the smart money says the bill will never come to a vote. According to Green, the bill will probably never be passed and even if it were, "it would never be implemented".

In the meantime, congressional talks designed to achieve greater bipartisan agreement on China's currency are expected to continue. One hopes that constructive US dialogue with Beijing will continue as well.

Frederick W Stakelbeck Jr is an expert on bilateral and trilateral alliances as they relate to China foreign policy. His writings address the implications of China's emerging regional and global strategic influence and relationships upon US national security. Comments can be forwarded to frederick.stakelbeck@verizon.net.

(Copyright 2006 Asia Times Online Ltd. All rights reserved. Please contact us about sales, syndication and republishing .)

US senators at ease over yuan's reform (Mar 25, '06)

Neo-protectionism puts US dollar at risk (Mar 21, '06)

Yuan at record high before US senators' visit (Mar 21, '06)

US walks China trade tightrope
(Apr 29, '05)

Intellectual property piracy rocks China boat (Sep 16, '04)


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