Analysis: China protectionism equals votes

By CHRISTIAN BOURGE, UPI Congressional and Policy Correspondent  |  Sept. 15, 2003 at 4:15 PM
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WASHINGTON, Sept. 15 (UPI) -- To the dismay of economists and some industry officials critical of the China's trade practices, the failure of U.S. officials to persuade the Communist regime to stop artificially setting the value of its currency is bringing both the protectionist tendencies in the U.S. Congress and the Bush administration's efforts to shore up support for the 2004 election into focus.

In a visit to China this month, Treasury Secretary John Snow pressed the Chinese government to let the country's currency -- the yuan -- trade openly on world markets instead of relying on its longtime practice of fixing the currency's value to the U.S. dollar.

China's government has largely rebuffed the Bush administration's request regarding with the practice, which is emerging as a central issue in the debate over how best to deal with China's trade policies.

U.S. manufacturing interests contend that the currency valuation procedures provide Chinese manufacturers an unfair advantage both domestically and on world markets by making the price of Chinese goods artificially lower than they would be if the country's currency value was established via market forces.

American industry's concerns about China have become a central tenet of White House trade efforts in recent weeks, with Bush officials parroting corporate claims that such practices are unfair and hurting their bottom line.

The support for floating China's currency has also come from Canadian officials and the European Union, which said last week that the yuan's artificially established value is also hurting European exporters.

The administration's major push demonstrates both an effort to appease industry and to affix some blame for the massive loss in U.S. jobs -- particularly manufacturing work -- since Bush took office in the run up to the 2004 election.

In a speech in Detroit Monday, Commerce Secretary Donald Evans sought to link the Bush administration's effort to convince China to reform its trade policies with the protection of U.S. jobs. Evans said the administration realizes that U.S. manufacturers only want a level playing field and open international markets.

"American manufacturers can compete against any country's white collars and blue collars, but we will not submit to competing against another country's choke collars," he said.

A coalition of U.S. business and labor groups, lead by the National Association of Manufacturers, has expressed disappointment in China's muted response, threatening to file a complaint with U.S. trade officials to investigate if China's current valuation scheme amounts to an unfair trade practice under U.S. law and therefore should face import duties.

Members of Congress have expressed particular alarm at the fact that the bilateral trade surplus between the two counties was $103 billion in 2002, placing particular blame on China's currency practices.

In July of this year, the U.S. trade surplus with the China was $11.3 billion on imports to the United States of $13.4 billion, an all-time monthly high. The total trade deficit through July of this year is $40.3 billion.

At a Senate hearing on the trade deficit last Thursday, Sen. Paul Sarbanes, D-Md., warned that the Bush administration must take action soon to rectify the trade imbalance.

"If it's not addressed, you're going to get pressure for other, more direct measures to try to correct this situation," he said.

This direct pressure has already arrived, coming from Sens. Charles Schumer, D-N.Y.; Lindsey Graham, R-S.C.; Jim Bunning, R-Ky.; and Richard Durbin, D-Ill, who are working to enact legislation imposing a 27.5-percent tariff on all imports from the country if the country does not float its currency on the open market.

Claude E. Barfield, an economist at the conservative American Enterprise Institute, said that the Senate effort to impose tariffs of Chinese goods for not meeting U.S. demands is a kind of "dumb-ass demagoguery" and smacks of the kind of scapegoating that has come to discussions of the decline of manufacturing in the United States.

"We would be breaking our WTO (World Trade Organization) obligations (by enacting such a law)," Barfield told United Press International. "We can not just raise tariffs beyond what we have agreed to in the WTO. These guys know that."

Although there are harsh words on the subject coming from Congress and industry, policy experts and economists note that such protectionist efforts ignore the intermingling of the U.S. and Chinese economies and related economic subtleties. They also discount the impact China's currency policy ultimately has on America's trade imbalance with the country.

They say that protectionist tactics like those proposed in the Senate could potentially cut off an important source of foreign capital to American markets. For instance, the Chinese buy a substantial portion Treasuries and bonds issued by the U.S. Federal Reserve, helping keep interest rates low in the United States.

Richard C. Bush III, director of the Center for Northeast Asian Policy Studies at the Brookings Institution, said that the Chinese would view a move to impose tariffs as an attempt by U.S. officials to use sledgehammer rather than a scalpel to address their concerns.

"That is the wrong tool for a legitimate problem," Bush told UPI.

Some economists also say that while the trade deficit is a problem, it has more to do with the way in which U.S. companies deliver services and goods to China than the country's currency practices.

For instance, U.S. companies had sales of $32 billion within China in 2000. But these sales are not included when calculating the trade imbalance between the two countries, making the imbalance much smaller than the often cited number of $103 billion.

Barfield and other economists noted that even if China could float its currency and not disrupt its economy, it would not have the massive effect on the trade imbalance that some proponents believe.

Another factor in the equation is the fact that the trade imbalance between China and the United States has increased to some extent because the country has been taking over imports to the United States from other countries.

If Chinese firms were not sending much of their imports -- such as like textiles, shoes, and toys -- to the United States, firms from other countries would fill the void.

In addition, many Taiwanese, South Korean, European and Japanese firms are selling products in the United States that are manufactured in China.

Economists generally agree that the country's currency policy does distort the international market and must be liberalized because it creates inflationary pressures within the Chinese economy that could have immense long-term negatives. But even industrial interests opposed to China's currency practices are hostile to the Senate tariff proposal.

Nevertheless, they clearly want the Bush administration to take decisive action in some form.

A spokesman for the National Association of Manufacturers said that while the group does not support Senate efforts to impose tariffs on Chinese goods and circumvent free trade practices, the situation with China is, "unsustainable."

"We are losing jobs because of the unfair trade practices of several foreign countries, particularly China's," NAM's Hank Cox told UPI. "We do not want to start a trade war with our trade partners. However we have been warning the Bush administration and other that if they don't deal with these outrageous manipulations of their currency and other activities the Chinese engage in, it is going to lead to this kind of protectionist pressures."

But relief may not come from the Bush White House.

Brooking's Bush played down the strong rhetoric being heard from American officials, saying that it is clear the White House is just going though the motions on the issue.

He said that national security concerns related to North Korea remain paramount and China's support is integral in the U.S. effort to get the North Korean regime to end its nuclear weapons programs.

"The Korean thing is very high stake and China has played a critical role in creating the process to deal with it," said Bush. "One can't know how much pressure we can get away with regarding the exchange rates. In that context, you need to be cautious."

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