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Promises and Perils: The U.S.-PRC Trade Relationship - Center for National Policy
Date: 7/11/2007
Written By: William A. Reinsch, President, National Foreign Trade Council

Jeff has already provided the economic context for my remarks, and I'm not going to disagree with anything he said. The context is that:

  • China is growing – fast. It is doing what Japan did in the 50s and 60s, what Korea and Taiwan did subsequently, and what Malaysia, the Philippines, Indonesia, Thailand, and a host of others are trying to do right now.

  • But China is different because of its size and its politics. With 1.3 billion people, there are few limits on its capacity. It will become a true economic rival -- not the proverbial 800-pound gorilla but the 800,000-pound gorilla.  

  • While we had many of these same worries about Japan 20 years ago, at the end of the day it was still an ally and friend. China is not, which means its growth has strategic as well as economic implications.

  • Japan's allied status, however, did not save it from rhetorical excesses, best exemplified by the episode where several members of Congress bashed a Toshiba product to pieces outside the CapitolBuilding. 

  • Our experience over the next several years with China is likely to be very similar – rhetorical excess that is not matched by actual legislation enacted into law and certainly not by legislation likely to do anything about the problems that have been identified. Many are touted; few are chosen.

  • The reason for this is that the actions are in response to US problems which require US, not Chinese solutions. 
  • The key economic dilemma we all face is dealing with globalization as a force for both stability and instability as it simultaneously pushes countries to conform to market principles and to Western norms of rule of law yet at the same time rides roughshod over deeply ingrained cultural values, exacerbates growing problems of income inequality, exploitation of workers, women, and children, and contributes to environmental degradation and resource depletion.
  • You've no doubt noticed these are not really trade problems, but they end up being treated that way for two reasons. First, it's always easier to blame the foreigners than yourself for your problems, so most bad economic developments are blamed on trade and lead to demands for protection. The U.S. is no exception there. Second, the WTO is the only multilateral organization that has an effective dispute resolution mechanism, so nations have an incentive to define their problems as trade grievances so they can take them there.
  •  You can see both these trends in current Congressional activity on China – an effort to blame our problems on them, and, in part, to seek multinational solutions along with unilateral ones.
  • First, let's define the problems. The macro problems are enormous trade and current account deficits, the single largest element of which is China.
  • The micro problems are more politically sensitive – job loss, offshore outsourcing, erosion of the manufacturing base – "hollowing out" – fear and insecurity about the future. Even those who have jobs are not sure they're going to be able to keep them.
  • The Congressional response thus far has been to attack China on currency misalignment and to propose remedies that range from trade law changes to multilateral action to a variety of retaliatory steps.
  • These are illustrated in what are probably the for most relevant pending bills.



S. 1607- Currency Exchange Rate Oversight Reform Act of 2007 (Baucus-Grassley)

1. Requires the Secretary of the Treasury to biannually list ‘fundamentally misaligned currencies" and "fundamentally misaligned currencies for priority action."

  1. Currencies that require priority action come from a country that is intervening in the exchange market on a large scale, accumulating reserves on a large scale, implementing excessive capital reserves, or doing other things deemed necessary for priority action by the Secretary.



  1. Following bilateral consultations, if the currency is still misaligned after 180 days, The US will adjust antidumping calculations to reflect the misalignment of the currency, prohibit federal procurement, request the IMF to consult with the offending country, prohibit OPIC financing or insurance, and instruct our representatives to oppose multilateral bank financing. It also obligates the US to oppose changes in IMF or other institution governance that would advantage a country whose currency is misaligned.



  1. After 360 days, if the problem still exists, the USTR would have to request WTO consultations and the Secretary would consult with the Federal Reserve Board of Governors to discuss taking remedial intervention in the currency markets. These remedial actions would be coordinated with the IMF and other monetary authorities.

  1. Finally, the President can waive these steps if he determines that "taking such action would cause serious harm to the national security of the United States" or "taking such action would have an adverse impact on the United State economy substantially out of proportion to the benefits of such action," but there is also a process by which Congress can disapprove the waiver.



H.R. 2942- Currency Reform for Fair Trade Act of 2007 (Ryan-Hunter)

  1. This revised version of an earlier bill grafts the Baucus-Grassley antidumping concept onto the earlier version's subsidy concept to make the toughest of the four bills. Like Baucus-Grassley, it calls for a biannual report outlining fundamentally misaligned currencies and those in need of priority action, and it provides for a similar antidumping remedy, but to both priority and non-priority misaligned currencies.



  1. However, it also provides that CVD laws will apply to nonmarket economies, and that currency misalignment should be considered a subsidy in calculating the CVD duty.



  1. In contrast to Baucus-Grassley, the bill defines "fundamental and actionable misalignment," as cases where undervaluation is over 5% and has "consistently" been so for the past 18 months.



  1. The bill does not include the presidential waiver like Baucus-Grassley does.



H.R. 1229- Nonmarket Economy Trade Remedy Act of 2007 (Davis-English)

  1. As in Ryan-Hunter, this bill provides for application of the CVD law to nonmarket economies, and it provides that a country's status cannot be changed from NME without Congressional approval.



  1. Because of the nonmarket status of the Chinese economy, the bill outlines a methodology for calculating the additions to the countervailing duties in the case of unfair trade from China.



  1. There is no mention of currency or exchange rate policy or dumping.



S. 1677- Currency Reform and Financial Markets Access Act of 2007 (Dodd-Shelby)

       1. This bill focuses on whether or not a country is manipulating its currency, intentionally or not, to create a trade advantage over the U.S. Unlike the others, it was carefully drafted to be referred to Banking rather than Finance. As a result, it lacks the trade law changes of the other bills.



        2. After a foreign currency is deemed manipulated by the Secretary of the Treasury, the Secretary has 30 days to adopt a proposal to counter the manipulated currency, begin bilateral negations with the offending country, and use the U.S. voice at the IMF to request an effective balance of payments adjustment and to eliminate the unfair competitive advantage. If after 300 days the manipulated currency has not been adjusted, the Secretary shall pursue action under the WTO.



       3. The bill also lets Congress to disapprove of the Secretary's designation (or not) of a currency as being manipulated.

Sometime soon we also expect Congressman Levin to produce his own bill, which will no doubt be the one the Ways and Means Committee takes up. It will probably borrow liberally from the provisions I've just outlined.

From the standpoint of the bilateral relationship, while the Chinese will no doubt complain vociferously about whatever we do, these bills won't make much difference in the problems they intend to address, which unfortunately means that real solutions will be postponed even longer.

The main reason they won't make much difference is that fundamentally they rely on trade law changes that are particularlized. They only operate when someone files a specific case against a specific company or companies involving specific products and proves it's been injured by those imports. Only then are actual duties imposed, and only on the subject imports. But that is the same reason they won't have much of an impact – it will only be felt in the handful of sectors where cases are brought and won. For that same reason, they ought not to have an adverse impact on the trade relationship, although the Chinese will no doubt complain and retaliate. (They are not the Japanese!)

Will they achieve their intended purpose – acceleration of Chinese revaluation? Possible but unlikely. Treasury has had extensive conversations with the Chinese for three years on this. The bottom line is they know exactly what they need to do, which is exactly what we've told them they need to do, but they are reluctant to move as quickly as we would like. (Paulson story on timing.) In essence, they are pursuing an exceptionally conservative monetary policy. Nearly 9% appreciation in two years is not nothing but not nearly enough.

Keep in mind, however, that even if revaluation were faster, it's not entirely clear what the effect would be. Current estimates are that some 75% of the value of Chinese exports comes from components that have been imported, which would substantially mitigate the effect of a revaluation. Although it is changing, China is in many respects still an assembly platform, and it is hard to predict how currency fluctuations affect production costs except on a case by case basis.

Even if there is an effect that is substantial, conventional economics – the Phillips curve – suggests that it won't show up for 18 months, although there is some recent research that suggests that globalization is reducing that lag.

Ironically, if you want to focus on what might change the trade relationship most rapidly, it will be if they fail to do a better job on product safety. Far more than Congressional legislation, if the American consumer turns against Chinese products because it believes them to be unsafe or unhealthy, and begins seeking out other products in the marketplace, it could be devastating to many Chinese manufacturers.

What does this mean for us?

Are our fears will grounded? Will the Chinese economic powerhouse overwhelm Western economies, hollow out our manufacturing base and cost us millions of jobs?


I see three scenarios:

1. They address their problems and become an engine of growth for the global economy. The challenge for us in that case will be to adapt to an economic system where power is more diffuse and to ensure that economic rivals do not also become political or military rivals. The challenge for China will be to accept the increased responsibility for maintaining the trading system that comes with leadership. Unfortunately, there is no sign of that yet. If we collectively fail to meet those challenges, we will likely see a new bi-polar global system involving a United States- China rivalry. 


2. They fail, either economically or politically, in which case they will be preoccupied with their internal problems for a long time to come. Depending on the severity of those problems and the extent to which they spill over into the international system, the United States might be drawn into them as well.


3. They muddle through just like us – continuing to grow but continuing to face the same challenges they have now, which, if nothing else, will significantly constrain the international role each of them can play. This is the least interesting outcome, but the most likely.

Regardless of which scenario is correct, however, the economic consequences for us are not that different because they are an inevitable consequence of globalization and growth elsewhere, not just in those countries:  

  •  U.S. manufacturing will continue to lose jobs while improving productivity. We have been losing manufacturing jobs for 40 years, but mostly to technology – not China. The Chinese have actually lost millions more manufacturing jobs than we have.
  • Like everyone else, the United States must deal with the psychological and economic consequences of globalization in terms of lost jobs and devastated communities. The economic gap between the top and bottom in our society is getting worse and our adjustment programs to deal with it do not work well. A study released last month by the Financial Services Forum has some innovative ideas in this area that deserve attention.
  •  We should be wary of our increasingly precarious global financial position. We are deeply in debt to the Chinese, which increases their potential leverage over us, even though they could not exercise it without taking an enormous financial hit. For all of our economic might, I doubt that we can ignore economic fundamentals forever, and markets will one day decide one day that a declining dollar, massive debts and deficits, and low returns on T-bills are reason enough to flee the U.S. economy. The issue will be hard landing or soft landing, and the longer we do nothing, the more likely it will be the former.

In spite of all these challenges, the good news is that doing something about many of them is under our control, not anyone else's. We can choose the right tax, trade and immigration policies that encourage foreign investment and make the United States a welcoming place to visit, live and work. We can choose to improve our educational system and can create a 21st Century workforce. We can choose to address the massive imbalances in our trade and current accounts.


The one thing we know for sure is that the rest of the world, particularly China and India, will continue to run faster, so it falls to us to pick up the pace if we want to retain our global position.