INSIGHT: Record US deficit with China may drive legislation

05 September 2013 17:47  [Source: ICIS news]

By Joe Kamalick

ChinaWASHINGTON (ICIS)--A new record US trade deficit with China might help drive congressional support for tougher action against Beijing’s longstanding currency manipulation, a goal that American manufacturers have been pressing for years.

The Department of Commerce (DOC) said this week that the overall US trade deficit rose to $39.1bn (€29.7bn) in July from the revised shortfall of $34.5bn in June, an increase of 13%.

Total US exports in July were $189.4bn against imports of $228.6bn.

What troubles many US manufacturers, other exporters and even non-exporting businesses is the fact that the US trade deficit with China constitutes by far the largest element of the overall trade imbalance, and that Beijing’s trade advantage over the US is driven by the Middle Kingdom’s unfair currency manipulation policies.

Of the US global trade deficit of $39.1bn in July, fully $30.1bn of the shortfall was attributed to China, which accounted for 77% of the overall total.

The $30.1bn US trade deficit with Beijing in July also stands as the largest monthly bucket of trading red ink in US-China history.

“Our surging trade deficit with China is one of the key obstacles on the path to a true jobs recovery for American workers,” said Scott Paul, president of the Alliance for American Manufacturing (AAM), a coalition of US steel producers and the United Steel Workers (USW) labour union.

“No one in Washington is likely to even notice the fact that the July trade deficit with China was an all-time record,” Paul said.

The Manufacturers Alliance for Productivity and Innovation (MAPI) is among US business groups concerned about the trade deficit in general and the nation’s monster trading shortfall with China in particular.

Ernie Preeg, MAPI’s senior advisor for international trade and finance, noted that the US trade deficit with the Middle Kingdom is “huge and unprecedented” and should be a major concern for the nation’s policymakers.

“Our trade deficit with China represents the large majority of our global deficit, and it has been for ten years and more,” Preeg said.

He said it is worth noting that China exports five times more goods to the US than the US exports to China, and that the trade imbalance has been accelerating since the end of the Great Recession in 2009 through 2012.

However, Preeg said, the US-China trade relationship may be seeing slight signs of change, at least in the trade of manufactured goods.

Historically, “the US-China trade in manufactures is extremely unbalanced,” he said, and “over the past couple of years, through the first quarter of 2013, US manufactured imports from China were more than six times larger than US exports to China.”

“The second quarter figures, however, show a significant decline in this ratio from 6.1 in the second quarter of 2012 to 5.2 in the second quarter this year,” he said.

“This doesn’t mean that the US-China trade deficit will stay level or go down, but it does signal a change from the last several years when the deficit gap was going up, up, up,” he said.

Even so, a five-to-one trade ratio in China’s favour “is still highly lopsided”, Preeg said.

The US, he said, “should have a strategy to bring things back into balance”. In particular, he said, China should not be continuing its longstanding practice of intervening in financial markets to keep the yuan at an artificially low value.

Preeg noted that obligations and requirements under the World Trade Organisation (WTO) and the International Monetary Fund (IMF) agreement clearly prohibit the kind of currency manipulation that Beijing has pursued for years.

In particular, Preeg cited Article IV, Section 1(iii), of the IMF’s founding agreement and later amendments.

That IMF agreement section provides that fund members are obliged to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members”.

Among the definitions of manipulating exchange rates, Preeg said, is protracted, large-scale, official purchases of foreign exchange.

“Over the last ten or twelve years, China has officially purchased more than $3,000bn [€2,280bn] of foreign exchange,” Preeg said. “If that isn’t manipulating exchange rates, I don’t know what is.”

By keeping its currency undervalued, the Chinese government gives its domestic producers a pricing and trade advantage over US and other foreign businesses, and the same manipulative practice makes foreign products far more costly to China consumers compared with local products.

But Congress now may be poised to do something about Beijing’s addiction to currency manipulation.

US Representative Sander Levin (Democrat-Michigan) along with another House Democrat and two Republicans have introduced a bill, HR-1276, that would force the White House and Treasury Department to treat Beijing’s currency manipulation for what it is.

The bill, titled “Currency Reform for Fair Trade”, has a total of 125 supporters among House members and would require that that the US government treat a foreign nation’s undervalued currency as an illegal subsidy under US trade law and international agreements.

That in turn would allow the US to impose countervailing or antidumping duties on Chinese exports to the US.

“I think there is some momentum building in Congress for this measure,” Preeg said.

“We have to take a stand on this against China and some other countries that manipulate their currencies,” he added.

Whether HR-1276 gets through the committee process and then faces fractured fortunes in the deeply divided US Congress is questionable.

But Preeg suggests that the legislation could come into force through another route.

The White House and the US Trade Representative (USTR) are already hip-deep in negotiations on the Trans-Pacific Partnership (TPP), which gathers Australia, Brunei, Chile, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam in an expanded trading block.

If the final TPP agreement could include terms along the lines of Congressman Levin’s currency reform bill, it would present a united front of Pacific region trading nations against Beijing’s financial manipulations.

($1 = €0.76)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Joe Kamalick
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