INSIGHT: Congress moves to counter China’s currency manipulation

12 February 2015 18:47 Source:ICIS News

US Congress moves against China currency policiesBy Joe Kamalick

WASHINGTON (ICIS)--Congress this week launched a bipartisan assault on China’s longstanding currency manipulation policy, a practice that amounts to unfair subsidies to the Middle Kingdom’s manufacturers at the expense of US, European and other nations’ industries and jobs.

A group of Senate Republicans and Democrats introduced a bill, S-433, “The Currency Undervaluation Investigation Act”, that essentially would force the US Department of Commerce to assess duties on Chinese imports if it can be shown that those products benefitted from the Beijing government’s persistent under-valuation of the Chinese renminbi or yuan.

Those import fines, known as countervailing duties, typically are applied when a foreign manufacturer is selling goods in the US that were produced with the benefit of a direct government subsidy such as cash grants, free or discounted services.

US industries for many years have urged the Commerce Department to impose countervailing duties on a wide range of Chinese imports, arguing that they all benefit from the indirect subsidy of Beijing’s currency manipulations.

According to Senator Richard Burr (Republican-North Carolina), the Commerce Department under successive White House administrations has declined to impose countervailing duties linked to currency manipulation, arguing that those benefits are not related to a specific product and also serve to benefit non-exporters in China and consequently are not technically an “export subsidy”.

That Commerce Department policy has been criticised as being a smoke-screen to cover the unwillingness of several federal administrations to escalate trade sanctions against China for fear of triggering an all-out trade war with Beijing.

But the bill introduced by Burr, two other Republican and three Democrat senators, would require the Commerce Department to investigate whether currency undervaluation by a government (read China) provides a countervailable subsidy.

Those investigations would only be taken up if a US manufacturer or importer were to file a formal complaint alleging a currency-based subsidy and provides supporting documentation.

If the bill passes both houses of Congress and is signed by President Obama - no sure thing in either case - US companies likely will flood the department with currency-related trade complaints.

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

According to the Alliance for American Manufacturing (AAM), Beijing’s longstanding currency undervaluation practices are the leading culprit in the equally longstanding - and rapidly growing - US trade deficit with China.

The US trade deficit with China reached a new high in 2014, rising to more than $342bn. Just 20 years ago, in 1995, the deficit was only $33bn.

AAM president Scott Paul says that the deficit is a US employment killer, accounting for 3.2m lost manufacturing jobs alone between 2001 and 2013.

“Manufacturing has still only recovered a fraction of the jobs we lost during the Great Recession,” Paul said. “This bipartisan legislation will help to bring more manufacturing jobs back to our shores.”

Paul charged that, as have earlier administrations, “the Obama administration wants to pass the buck on currency manipulation”, in other words, not confront Beijing directly on the matter.

“We know that only constant, sustained pressure stops trade cheating and currency manipulation in its tracks,” Paul said, adding that he hopes that Congress will move quickly to pass the Burr bill.

He also is pressing the Obama administration to include a clause on currency manipulation in the Trans-Pacific Partnership (TPP) trade agreement now being negotiated with Beijing, the Japanese government and other Asian nations.

He noted that in addition to China’s unfair currency manipulation practices, other Asian nations have similar policies that also cost US jobs.

“Weak yen policies and growing trade deficits with Japan cost nearly 900,000 US jobs in 2013,” Paul said.

“The US trade deficit with Japan and 10 other countries in the TPP - many of whom engage in currency manipulation - was more than $260bn last year,” he said.

Senator Sherrod Brown (Democrat-Ohio), a cosponsor of the Burr bill, also was critical of US policy in pursuit of the TPP at whatever cost.

“Instead of addressing our growing trade deficit,” he said, “we’re pursuing trade deals with countries that manipulate their currency.”

“Foreign companies that don’t play by the rules are actively trying to undermine the effectiveness of our trade laws,” he said, adding: “It’s time to level the playing field for American manufacturers and workers.”

Another Democrat senator, Charles Schumer of New York, also challenged the wisdom of pursuing a broad TPP trade deal with Asian nations if they are not willing to practice fair trade under existing WTO rules.

“For far too long, China, Japan and other countries have rigged the rules of the game and millions of American workers have lost their jobs,” Schumer said in announcing that he is a cosponsor of the bill.

“While these countries have manipulated their currencies, American manufacturing has been hollowed out, and it is time to put those days in the rear view mirror,” he said.

“If we are going to even consider passing a free trade agreement [the TPP] with Asian countries, Congress must pass and the president must sign a tough currency bill,” he added.

This suggests that the Obama administration’s hopes of completing the TPP may hinge on whether the Senate - which must approve a final TPP treaty - will allow the major trade deal to go forward without first satisfying bipartisan concerns in the Senate over currency manipulation.

In a second action this week against China’s trade practices, US Trade Representative (USTR) Michael Froman launched a formal complaint before the WTO, charging that Beijing also is providing direct and illegal subsidies to thousands of Chinese companies by providing free or discounted services, cash grants and other incentives to manufacturers and exporters in 179 production centres across China, known as “demonstration bases”.

Froman said that these direct subsidies benefit Chinese production and exports in seven key sectors: textiles, advanced materials and metals, light industry, specialty chemicals, medical products, agriculture and hardware and building materials.

The action announced by Froman this week is only the first step in a long WTO dispute resolution process that could take years to complete.

In the meantime, the six senators who have sponsored the “Currency Undervaluation” bill are pressing for fast action on the measure and have called on industry to weigh in with members of Congress on the issue.

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By Joe Kamalick