China Programme • Volume 14 • Number 22 • 16th June 2010

US Lawmakers Ramp Up Pressure on Chinese Currency

Discuss this articleShare your views with other visitors, and read what they have to say

For a few months, the US and China pulled their punches in their sometimes-feisty debate over Beijing’s exchange rate policy. No longer. US Senator Chuck Schumer, a Democrat from New York, vowed last Wednesday to push for a vote “in the next two weeks” on legislation that would threaten China with punitive tariffs if it failed to raise the value of the yuan (also called the renminbi), which Beijing has maintained at a rate of about 6.83 to the dollar since July 2008.

Chinese state media hit back over the weekend, deriding US lawmakers’ pressure on China as “nothing more than a bunch of baby-kissing politicians trying to swing voters by manipulating the yuan debate.” The Xinhua news agency said the congressmen were “resorting to their old trick of blaming everything on China,” a “dangerous game” that diverted public attention from “more serious domestic economic problems, which are caused in part by their incompetence.”

Schumer has long been one of Congress’s most vocal critics of China’s currency policies, accusing Beijing of maintaining an artificially low exchange rate that would allegedly tax imports and subsidise its exports.

But even US Treasury Secretary Timothy Geithner, who has taken a softer approach on the issue over the past two months, had to acknowledge last week that bilateral negotiations had yielded no clear indications of when China might relax its controversial peg of the yuan to the dollar.

In April, Geithner raised the ire of Schumer and other Congressional China currency hawks by delaying the scheduled release of a report that could have accused China of currency manipulation. That decision marked the clearest sign yet that the Obama administration had shifted its strategy on the issue of China’s currency, forsaking publicly upbraiding Beijing in favour of quiet diplomacy, an approach that some observers say is more likely to yield results.

However, Geithner admitted to the Senate Finance Committee on Thursday that while Chinese officials agreed that the yuan should rise, mainly to combat inflation, they had provided no sign about when they would act. “To be honest, I don’t know whether we are at the point where we are going to see meaningful progress in the short term,” Geithner told the committee, according to a report in The Washington Post.

The calculus surrounding China’s decisions about if, when, and how much to let the yuan appreciate has been greatly complicated by sovereign debt woes in Europe, which have caused the euro to plummet against the dollar - and by extension, the yuan - over the past two months. Policymakers in Beijing must be nervous: the EU is the biggest market for Chinese exports, even bigger than the US- and Euro-denominated bonds a valuable alternative in their foreign reserves mix.

In the United States, the politics - though not the economics - of China’s currency is crystal clear: trade deficits and high unemployment are an unhappy combination for lawmakers, especially those, like Schumer, who are seeking re-election in November.

Schumer’s bill, which has been co-sponsored by 18 other senators from both parties in Congress’s 100-member upper chamber, would require the US Treasury Department to conduct twice-yearly investigations into the currencies of major US trading partners to identify “fundamental misalignments” in their real effective exchange rates. If countries are deemed to have consistently failed to rectify alleged misalignments in their currencies, the bill provides for countervailing duties to counteract the advantage conferred by the undervaluation. Anti-dumping investigations would also be required to reflect undervaluation when comparing export prices to domestic prices.

Earlier this month, Schumer and fellow Democratic senator Sherrod Brown wrote to US Commerce Secretary Gary Locke to complain that countervailing duty investigations of Chinese paper imports had failed to take into account US manufacturers’ allegations that China’s currency undervaluation constituted a subsidy of as much as 40 percent.

The Chinese government argues that there is no basis in WTO rules for including exchange rate considerations in trade remedy investigations. Yao Jian, a spokesperson for the Chinese commerce ministry, said that WTO provisions for such investigations cover specific instances of alleged subsidisation, not a country’s overall currency policies, reports Bloomberg.

Scott Lincicome, a Washington-based trade lawyer and blogger, underlined the difficult politics surrounding the yuan. Hopes that China would de-fang the issue by allowing its currency to appreciate in time for the G20 summit have dimmed due to the eurozone’s problems and the resulting unease in global financial markets, he said.

This, coupled with new trade data showing a growing Chinese trade surplus and US trade deficit, would strengthen the hand of Schumer and other backers of the legislation.

Although the White House seemed likely to try to discourage senators from bringing controversial currency legislation to the floor of the House or Senate for a vote, Lincicome reckoned that odds were “above 50 percent” that this would happen in the Senate anyway, with chances for passage about the same.

Even if the Senate passed a bill on exchange rate policies, trade penalties for China would be unlikely to become law any time soon, Lincicome explained.

The House would still have to pass the bill. And if a Senate bill called specifically for tariffs on China, the Senate would have to vote again on the legislation after House passage. US law mandates that all revenue measures originate in Congress’ lower chamber.

But House leaders have been less eager to move currency legislation, and the House has a busy legislative schedule in the five-odd weeks before Congress’s August recess, which will in turn be followed by the mid-term election season.

“The chances that China will have acted on their currency by then appear more likely,” Lincicome said.

ICTSD reporting; “Geithner testifies; US and China continue negotiations on currency policies,” THE WASHINGTON POST, 11 June 2010; “WTO rules don’t support probes aimed at currency, China says,” BLOOMBERG, 12 June 2010.