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2 SPEAKING
FREELY US failure over Chinese trade
tactics By William R Hawkins
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
Last Wednesday there
was an unusual joint hearing in the US House of
Representatives by the Ways and Means Subcommittee
on Trade; the Financial Services Subcommittee on
Domestic and
International Monetary Policy,
Trade and Technology; and the Energy and Commerce
Subcommittee on Commerce, Trade and Consumer
Protection. The topic was: "Currency Manipulation
and its Effects on US Business and Workers".
Though Japan and China were both topics of the
hearing, this was mainly to avoid seeming to gang
up on China.
China, however, deserved to
be the real center of attention. The US goods
trade deficit with China was US$232.5 billion in
2006, an increase of $31 billion over 2005, and an
amount that accounts for more than one-third of
the entire US trade deficit. Chinese trade
continues to be extremely lopsided, with US goods
exports of only $55.2 billion in 2006 against
imports of $287.8 billion - more than a 5:1
negative ratio.
There are a number of
reasons for China's economic boom - and America's
poor showing. The administration of US President
George W Bush has recently filed World Trade
Organization (WTO) cases against China for illegal
subsidies and intellectual-property theft, but
currency manipulation is a problem that still
needs to be tackled.
Economists have
estimated that China's currency, the yuan, is
undervalued by as much as 54%, according to a
recent survey by the Congressional Research
Service. In July 2005, China began to allow the
yuan to appreciate. On paper, it is up 7.3% since
then, but as US Federal Reserve chairman Ben
Bernanke has stated, the situation "has likely
worsened recently", with the yuan's trade-weighted
effective real exchange rate having fallen about
10% over the past five years.
Bernanke has
described China's currency policies as a "subsidy
to exports". Beijing must accumulate
foreign-exchange reserves to maintain its
arbitrarily fixed exchange rate. As a result, the
government of China today holds more than $1.2
trillion in foreign-exchange reserves, compared
with US reserves of about $69 billion.
The
US Omnibus Trade and Competitiveness Act of 1988
requires the secretary of the Treasury to
determine whether foreign countries manipulate
their exchange rate with the US dollar for the
purpose of "gaining unfair competitive advantage
in international trade". Such a finding would
require the treasury secretary to initiate
negotiations on an "expedited basis" for the
purpose of eliminating the unfair advantage. The
Treasury Department has repeatedly declined to
find that either China or Japan manipulates the
rate of exchange. The Treasury Department was
required to submit its most recent report to
Congress on April 15, but it is overdue.
The Office of the US Trade Representative
(USTR) also has decided not to investigate China's
currency practices under Section 301 of the Trade
Act of 1974, or to initiate a WTO case to address
these practices. It has also rejected attempts by
affected industries and members of Congress to
initiate cases. The USTR holds that this is an
issue to be handled by the Treasury. The Treasury
has "engaged" China on the currency issue under
the "Strategic Economic Dialogue" (SED). The first
SED took place in Beijing last December. The next
SED will begin in Washington on May 23, but
nothing should be expected from it. It is merely
"chit-chat" diplomacy meant to avoid the kind of
serious, results-oriented negotiations that would
be called for under a Treasury finding against
China.
A year ago, then-treasury secretary
John Snow seemed to be losing patience. He said
last May that "if current trends continue without
substantial alteration, China's policies will
likely meet the technical requirements of the
statute for designation". But he was then replaced
by Henry Paulson, the former chief executive
officer of Goldman Sachs, the most active
investment bank in China. Paulson, who made a
fortune helping build Chinese economic strength,
has no desire to confront the monster he helped to
create.
At an event this May 2 at the
Peterson Institute of International Economics
(PIIE), Paulson said: "I hesitated to take this
job because I could see the protectionist
sentiment in the US, and nationalism and
protectionist sentiment in China's local elections
and in selecting the State Council this fall, and
elections in the US, and therefore the likelihood
of legislation." As a transnational banker, he
does not want to deal with issues on a
national-interest basis. In other words, he
doesn't want to do his job.
Just how far
the US Treasury will go to avoid doing its job was
indicated by the testimony of deputy assistant
secretary Mark Sobel at the May 9 House hearing.
He made the astounding
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