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	VOLUME 13, ISSUE V - JUNE 2011

U.S.-China Economic Relations

ANOTHER CONGRESSIONAL PUSH TO LEGISLATE EXCHANGE RATES

You'd think that with the bonfire for another global financial meltdown already well fueled – our soaring and nearly out-of-control debt; 9+ percent unemployment, the growing Eurozone debt crisis; etc., Congress could find something better to do with its time than reach for another can of gasoline. But no, led by Senators Chuck Schumer (D-NY) and Lindsey Graham (R-SC), the Senate is once again poised to take another run at legislation that would be far more likely to disrupt our trade with China than improve our trade balance or bring jobs back to America.

We have written on numerous occasions over the years about previous efforts by Messrs. Schumer and Graham to force China to revalue its currency and we won't belabor the arguments again. This session's version of Schumer-Graham incorporates virtually all of the legislation introduced by the pair last year, and also adds key provisions of the currency legislation passed by the House last September (See 11-09 “China Update” for commentary on that bill). Boiled down to its essentials, the measure attempts to require China's government to cease manipulating its currency to gain an advantage on pricing of China's exports and permit the RMB exchange rate rise against the US Dollar. Failure on the part of China's government to do so would trigger a series of measures by the U.S. government, including the imposition of countervailing duties potentially on all of China's exports to the U.S. The measure enjoys broad bipartisan support in the Senate; the House passed a similar measure last September and might be ready to go along with the new Schumer-Graham bill, even though the Republicans now control the House.

The U.S.-China Business Council has drafted a letter that will soon be transmitted to members of the Senate and House. I have already advised the USCBC that the Washington State China Relations Council will be a signatory on this letter, firmly believing as I do that the type of legislation being considered will not advance its stated goals but will, contrarily, be injurious to our state's businesses, farmers and workforce, dramatically shrink our exports to China, create further job loss in the U.S. and quite likely depress the global economy in much the same manner of the Smoot-Hawley Act in the 1930s. Even if China were to comply and raise its exchange rate against the Dollar under pressure from U.S. legislation (extremely unlikely), the only certain effect would be to raise the U.S. consumer price index by one percent or more (see a report on this subject in the June 2011 edition of “Monetary Trends,” prepared by the Federal Reserve Bank of St. Louis), rather than lead to business and job expansion in the U.S.

The letter by the USCBC lays out well the arguments against this legislation. Although it is still in draft form and there may be some edits to the final version, the draft text below is essentially what will be presented: (Begin Text)

Dear Senator/Representative:

Like Congress and the Administration, we agree that China needs a yuan exchange rate that responds to trade flows and that China should move steadily towards a market-determined exchange rate. In addition to continuing U.S. government efforts, our organizations support strong, coordinated and enhanced multilateral pressure through multiple international organizations such as the G-20 and APEC to achieve concrete progress on China's currency and exchange rate policies.

Unilateral legislation on this issue would be counterproductive not only to the goals related to China's exchange rate that we all share, but also to our nation's broader goals of addressing the many and growing challenges that we face in China, including inadequate protection of intellectual property, restrictions on market access, the need for financial services liberalization, restrictions on the export of commodities such as rare earths, discriminatory indigenous innovation and other industrial policies. Above all, such legislation would do more harm than good to job creation and economic growth at a time when the United States dearly needs both.

Legislation which would seek to increase tariffs on imports from China is unlikely to incentivize China to move expeditiously to modify its exchange policies. Rather, it would likely have the opposite effect and could engender retaliation against U.S. exports into the Chinese market – currently the fastest-growing market for U.S. exports. Counterproductive tariff legislation would not get us closer to the goal of a market-driven exchange rate and would shift the focus away from the core issue of China's currency and onto U.S. unilateral action.

Moreover, it is doubtful that U.S. action to countervail undervalued currency could meet the WTO's standards for the application of countervailing duties (CVDs). Any legislation that requires the Commerce Department to estimate the “true” exchange rate would create a process that will be highly subjective and potentially politicized.

We urge you to oppose currency legislation and instead work with and vigorously call on the Administration to develop a robust bilateral and multilateral approach to achieve tangible results not only on China's exchange-rate policies, but also on other Chinese policies that are harming American businesses, workers and farmers.

Having successfully led a caravan of intrepid tourists along a significant stretch of the Silk Road last summer, "yr. humble and obedient, etc..." is preparing to embark again on another China adventure shortly, this time to southwest China. This summer our merry band of pranksters will include Seattle notable Bill Stafford, the retiring (but never shy) president of the Trade Development Alliance of Greater Seattle and his daughter, who will be charged with the daunting task of providing adult supervision for her sometimes-difficult-to-corral father. But Bill is also a professional-grade photographer whose decades of work have been displayed at Seattle's Museum of History and Industry, so our travels this year are likely to be thoroughly and stunningly memorialized.

This year's adventure will begin in Beijing where we will spend several days taking in some of the city's world famous features. Then we will proceed to Guilin in southwest China's Guangxi Province, where we will, inter alia, travel down the famous Li River with is spectacular cliffs – the subject of innumerable landscape paintings by centuries of Chinese artists. After Guilin we will spend about ten days at various locations in Yunnan Province in China's far southwest with its towering, snow capped mountains and lush and culturally diverse valleys.

After a long, cold and damp Seattle winter (we went more than nine months without the temperature reaching 70 degrees), I think our tour participants will be more than ready for a change of pace and much warmer temperatures! While not meaning to leap too far ahead, I've nevertheless begun to ponder where I might take a group next summer. I'm willing to consider any suggestions, as long as they embrace the concept of "China paths less traveled."