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
tofrederick.stakelbeck@verizon.net.
(Copyright
2006 Asia Times Online Ltd. All rights reserved.
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