Balancing the Tightrope: The Bush Administration on China Trade Policy

By Russell L. Smith and Caroline G. Cooper, Willkie Farr & Gallagher LLP

A policy battle is raging in Washington and, not surprisingly, it’s over China. The Bush Administration and a bipartisan group of legislators are at odds over how best to address long-standing concerns about the U.S. trade deficit with China, alleged currency manipulation by the Chinese government, and China’s failure to attack intellectual property rights (“IPR”) violations aggressively. Since the beginning of 2005, Members of Congress have introduced a range of initiatives on these issues that, if approved and signed into law, could make sweeping changes to U.S. trade law, return the United States to an era of Smoot-Hawley trade policy, and affect trade with far more countries than China. The Administration’s response so far has been opposition to most new legislation and increasingly harsher rhetoric about China’s unfair trade practices. Recently, both President Bush and Treasury Secretary Snow made public statements saying the Chinese government must hasten its adoption of a market-based exchange rate.

If the reaction from Senators at the recent confirmation hearing of USTR-designate Robert Portman is any indication of what may lie ahead for the Administration on China policy, then the fight is only just beginning. Representative Portman (R-OH) won some praise from Senators by vowing to “get tough” on China and empathizing with their concerns about the Chinese government’s unfair trade practices based on experiences his own constituents have had in trying to compete with Chinese imports. Although the Committee unanimously endorsed Portman for the position of USTR, this collegial relationship will not last when he becomes a member of the Bush Administration unless he goes beyond rhetoric and produces concrete results. Finding the right balance between President Bush’s policy goals with respect to China and Congressional protectionist pressures on the issue will be Portman’s biggest challenge.

Congress Wants Action, Not Rhetoric

Fourteen bills and resolutions have been introduced in the first session of the 109th Congress regarding China’s unfair trade practices. These legislative initiatives address a range of issues from China’s alleged currency manipulation to suspending its permanent normal trade relations status. Legislators have been motivated to introduce these measures in part because of effective lobbying by special interests who have been adversely affected by Chinese imports, and also by interests who wish to use such legislation as a vehicle for their complaints against other countries.
Only a hand full of bills have received any serious attention. A case in point is S.295, a bill introduced by Senators Charles Schumer (D-NY) and Lindsey Graham (R-SC) to impose an across-the-board tariff of 27.5 percent on Chinese imports if, after a six-month period, negotiations between the United States and China on the valuation of the yuan prove unsuccessful. Similar legislation was introduced by these Senators in the last Congress, but no action was taken.

To the surprise of the Bush Administration and Republican leaders, S.295 garnered considerable support recently during Senate debate on the Foreign Affairs Authorization Act, when Senators Schumer and Graham offered the bill as an amendment. When an effort was made to remove the amendment from consideration, the motion failed by a resounding vote of 33-67. Schumer and Graham withdrew the amendment from further consideration following an agreement with Senate leaders to bring up S.295 for floor consideration before July 26. House Republican leaders were alarmed that S.295 received so much Senate support; they now fear that a companion bill introduced in the House could attract a similarly lopsided vote if it were brought up for debate. Recently, Representative Sue Myrick (R-NC) introduced related legislation (H.R.1575) in the House.

Even more disconcerting is news that Senator Evan Bayh (D-IN) has placed a hold on USTR-designate Portman's confirmation vote until Senate leaders agree to a vote on legislation (S.593) he has cosponsored to apply countervailing duties ("CVDs") to nonmarket economies. As of press time this hold was still in place. A "hold is an informal means through which a Senator makes clear to the Majority Leader that he or she may try to delay a vote on legislation (or in this case a nomination) if the nomination is brought up. Similar legislation has been introduced in the House.

As a result of these developments, an effort is afoot in both the House and Senate to craft an omnibus China bill with two purposes in mind: 1) to address legislators’ concerns with respect to China, while at the same time not applying stringent duties on Chinese imports; and 2) to link China to votes on the U.S.-Central America/Dominican Republic Free Trade Agreement (“CAFTA-DR”).

There have been numerous reports that any comprehensive China legislation will contain provisions regarding currency manipulation. Perhaps more alarming is the possibility that language from H.R.1498 introduced recently by Representatives Tim Ryan (D-OH) and Duncan Hunter (R-CA) to clarify that exchange-rate manipulation by China is actionable under several provisions of U.S. trade laws could be included in such a bill. What is not readily recognized is that H.R.1498 contains a provision that would create a new remedy for currency intervention under the U.S. CVD laws. This remedy would not be China-specific and could therefore be used against any country. U.S. industry groups have included both Korea and Japan in the discussion of alleged currency manipulation.

The Administration’s Response

As the Bush Administration’s point person on China trade policy, Portman must approach Congress with one thought in mind: finding the right balance between the competing interests of those U.S. companies that reap benefits from investments in China and those companies that are adversely affected by competition from China.

At his confirmation hearing, Portman sought to balance his views by noting that China presents many opportunities for U.S. businesses, while also sounding a sympathetic tone in recognizing that it poses major challenges. Among these challenges are the U.S. trade deficit with China, restrictive industrial policies, limited market access on goods and services, and lack of implementation of its commitments on transparency and distribution rights. Portman boldly pledged to take a hard line with respect to China trade enforcement, specifically with regard to poor IPR protection. As a first priority, he said he would undertake a full review of all China trade issues and travel to China to address key trade concerns with his Chinese counterparts.

Portman’s comments seemed to placate some skeptical legislators; however, when, consistent with Bush Administration positions, he offered no support for legislation to punish China for alleged currency manipulation and to apply CVDs to nonmarket economies, Portman was at odds with many Finance Committee members, including Republicans. In so doing, Portman may have increased the resolve of legislators to push hard to incorporate language on these problems into a China trade bill.

With respect to alleged currency manipulation, Portman said that the Treasury Department has the lead in this regard, making it is very unlikely that a USTR under Portman would accept for investigation a recently filed Section 301 unfair trade practice petition on China’s alleged currency manipulation. The China Currency Action Coalition, which includes twelve U.S. Senators and twenty-three Representatives, on April 20 filed the petition with USTR, claiming that China’s actions provide an export subsidy for Chinese products and thus violate WTO rules. The most the Administration will do on this issue in the near term is further criticize the Chinese government for maintaining an undervalued currency in the biannual Treasury Department report on foreign exchange rate policies, and maintain its verbal pressures for China to act soon.

On the issue of applying CVDs to nonmarket economies, Portman said that doing so would be difficult, and cautioned that applying CVDs could raise questions at the WTO. Moreover, he noted that the United States would risk having China assert its market economy status; he does not believe that China should be designated as a market economy.

Outlook

Finding the right balance on China policy has important implications for the Bush Administration, the most significant of which is passage of CAFTA-DR. The Bush Administration has been accused of doing little to back legislators in their efforts to bolster support for CAFTA-DR, leaving House and Senate Republicans with few options for gaining additional support, especially from textile state representatives. Thus, one motivation for Republican leaders to develop China legislation has been to entice textile and other manufacturing industry state representatives to support CAFTA-DR. The big question is whether President Bush would support such a China bill.

A bipartisan, leadership-supported China bill will pass the House and Senate easily, unless President Bush takes a strong position in opposition to it. At this time, given U.S. impatience with China, what position Bush would take on such a bill is open to question, particularly if the bill is considered a “moderate” approach compared to various current demands for imposing high tariffs on all Chinese imports. If votes for CAFTA-DR are conditioned on consideration of a China bill the potential for its adoption will also increase. Bush and Portman are trying to avoid linking these two trade initiatives, but the political climate may be such that Bush is forced to accept less than perfect outcomes on both issues if he is to stay successfully balanced on the China trade tightrope.