By
Russell L. Smith and Caroline G. Cooper, Willkie Farr & Gallagher,
LLP
In
the 1980s and 90s, Japan was the scapegoat that was blamed
for plant closings and job losses in the U.S. manufacturing
industry. These days, that label is more and more being
conferred on China. In the past few months, many U.S.
manufacturing sectors have united around the claim that
their high production costs render them unable to compete
with low-priced Chinese imports. They assert that their
problems would be solved if the Bush Administration and
Congress take immediate steps to force China to allow
the yuan to float, or to impose tariffs that will offset
China’s claimed exchange rate advantage.
So far, the Administration has reacted to these industry pressure tactics
by encouraging China to free float the yuan, but not insisting on immediate
action. Officials, at least those from the Treasury Department, recognize
it will take time for China to adopt a market-based exchange rate so as not
to precipitate an implosion of what is, for its massive bulk, a quite fragile
Chinese economy. In a move more directly responsive to industry and Congressional
pressure, the Administration has also encouraged major trading partners,
especially those in Asia, to support flexible exchange rates. At the recent
G-7 Finance Ministers meeting, Treasury Secretary Snow successfully convinced
Ministers to include in the final communiqué a mild statement that
endorsed more exchange rate market flexibility. Even this rather reserved
action has caused temporary turmoil in exchange markets, driving up the value
of the yen quite significantly.
Members of Congress are significantly less sophisticated in their approach
to this issue, and are acting mainly in response to 2004 election prospects,
which are expected to be strongly influenced by employment levels. In the
past month, a number of resolutions were introduced in Congress demanding
action on China’s alleged currency manipulation, and one urging (but
not requiring) new initiatives by the President has passed the Senate. While
more aggressive legislation may never be enacted into law, the message to
policymakers and U.S. trading partners is clear--continuing exchange rate
problems are heightening trade tensions and therefore the prospects for imposing
trade remedies.
Addressing the China Problem: China’s alleged currency manipulation
became a priority issue for Congress last May as a result of a hearing convened
by House Commerce-Justice-State Appropriations Subcommittee Chairman Frank
Wolf (R-VA). Agricultural producers joined furniture and pharmaceutical manufacturers
in testifying that the Chinese government supported a monetary policy that
kept the yuan pegged at an artificially low exchange rate relative to the
dollar. They considered China’s undervalued currency to be a subsidy,
warranting action under U.S. trade remedy law.
The issue continues to warrant attention because legislators claim they can
quantify the extent to which China can manipulate the yuan and the impact
this has on the U.S. economy. Legislators say that China can intervene in
the exchange rate market at any time because it has large foreign exchange
reserve holdings. They also claim that China’s currency manipulation
has given rise to a soaring U.S. merchandise trade deficit. The latest Census
Bureau data shows the U.S. merchandise trade deficit with China through the
first seven months of 2003 comprised nearly 21% of the overall U.S. merchandise
trade deficit. U.S. imports from China in July 2003 reached a record monthly
high of $13.4 billion, with no diminution in sight as the year-end holiday
selling season approaches.
At a September 9th Senate Foreign Relations Committee hearing on U.S.–China
relations, Republican and Democratic Senators charged that actions by the
Chinese government to manipulate the yuan violated WTO rules. They expressed
concern about statements by Treasury Secretary Snow following his trip to
China that the Administration would do little in the near future to pressure
China to float the yuan. Administration witnesses offered assurances that
the United States would ensure that China complies fully with all of its
WTO commitments. They cautioned, however, against thinking that the “structural
problems” in the Chinese economy that are driving China’s leaders
to control the value of the yuan could be resolved overnight. These include
billions of dollars in doubtful loans, problems with state-owned industries,
high unemployment, and potential instabilities resulting from burgeoning
foreign investment flows.
It is also noteworthy that some major U.S. industrial sectors, particularly
the U.S. auto industry, do not support these initiatives. They have substantial
investments in China, which would be adversely affected by a stronger yuan.
While they have not publicly opposed the business community’s efforts
regarding China, when asked they argue that for them, Japan’s intervention
in currency markets is more detrimental that China’s refusal to float
the yuan.
This caution seems to have had little impact either on the affected U.S.
industries or the Members of Congress who support them. Since September there
has been a continuing flow of legislative proposals threatening trade restrictions
against China, and justifying such threats by asserting that currency manipulation
violates U.S. trade remedy laws and WTO subsidy rules. S. 1586, introduced
on September 5 by Senators Schumer (D-NY), Bunning (R-KY), Dole (R-NC), Durbin
(D-IL), and Graham (R-SC) authorizes the Treasury Department to enter into
negotiations with China to float the yuan and to certify to Congress that
the Chinese government is no longer intervening in the exchange rate market.
If the Chinese government fails to value base the yuan on an acceptable market
rate within a specified period of time, the Administration would be authorized
to impose an across-the-board tariff on all Chinese exports to the United
States of 27.5%--an amount equal to the claimed average percentage rate by
which China has devalued its currency.
The House companion bill, H.R. 3058, would also require the Treasury Secretary
to report annually to Congress on how China has manipulated its currency.
The legislation authorizes the Administration to impose a tariff, and in
some cases an additional tariff, on all imports from China at a percentage
rate “equal to the rate of manipulation.” Although these bills
will most likely never become law, the extreme approach they take invite
use of existing trade remedy laws, such as dumping and safeguards. These
appear moderate by comparison although in reality are just as exclusionary.
The proposals that have received favorable attention on Capitol Hill and
in the White House are those that are WTO-consistent and encourage, rather
than threaten, affected countries. Some of these bills broaden the countries
of concern by including Korea, Japan, and Taiwan, as well as China as alleged
currency manipulators. Some also include potential calls for “unfair
trade practice” actions under Section 301 of the Trade Act of 1974.
This long-dormant provision permits the United States to investigate and
negotiate with other countries on unfair trade practices, but any action
to restrict trade could only come as a result of a successful WTO dispute
resolution case. That, in turn, is highly unlikely, since it is unclear whether
the WTO rules would permit such a case, whether exchange rates are a valid
basis alleging WTO inconsistency, and whether the Administration would be
willing to bring such a case.
Next Steps: Given the current “jobless recovery” in the United
States, these trade-related political pressures are no surprise. The next
step for legislators and manufacturers is getting the Administration to do
more to press China to float the yuan. For now, President Bush wants limited
pressure on China. The most that legislators can probably expect from the
Administration in coming months is that the annual Treasury Department report
to Congress on foreign exchange rates will include a lengthy section on China.
If the White House decides to put more pressure on China, it is difficult
to know how that will manifest itself. It is entirely possible, if not probable,
that future cases seeking special safeguards against Chinese imports will
be more successful than those brought in the past. This would be the type
of “signal” that the Bush Administration could be expected to
send to China. This would express that China is free to act as and when it
wishes on exchange rates, but that as long as the perceived currency manipulation
persists, the Administration will respond to political pressures with the
tools over which it has discretion. These include trade remedy laws, which
allow affected U.S. industries to protect themselves, at least temporarily,
from Chinese imports.
