APRIL 2004

Dealing with China

Complaining that the White House has failed to do enough to pressure China to float its currency, a bipartisan group of US Senators requested an emergency meeting with President Bush, Treasury Secretary Snow, and USTR Ambassador Robert Zoellick to discuss concrete action the federal government can take to address the continuing illegal undervaluation of the yuan.

In a letter sent to President Bush, Sen. Chuck Schumer (D-NY), along with Republican Senators Lindsey Graham (SC), George Voinovich (OH) and Democratic Senator Richard Durbin (IL) wrote that both the Senate and House have passed resolutions by overwhelming margins expressing their deep concern over China's currency manipulation and its impact on their constituents.

The Senators outlined a series of steps that the US has so far failed to explore or undertake with regard to getting the Chinese to float the yuan currency, including:

• Under Section 301 of the US Omnibus Trade and Competitiveness Act of 1998, the Secretary of the Treasury is obligated to consider whether any countries manipulate the rate of exchange between their currency and the dollar to prevent the effective balance of payments adjustments or gain unfair advantage in international trade. If such violations are found, the Treasury Secretary is required to undertake negotiations with the manipulating countries that are running significant trade surpluses.

• Treasury has the authority to push for action under International Monetary Fund (IMF) rules. According to the IMF, a pattern of "protracted large-scale intervention in one direction in the exchange market" is a principal indicator of currency manipulation. The IMF Articles of Agreement, which China has agreed to, prohibit currency manipulation to gain unfair advantage over other members.

• China's undervalued currency could be a violation of the World Trade Organization (WTO) Subsidies Agreement, which could lead to action under the WTO dispute settlement procedures.

Schumer, Graham and Durbin, as well as Senators Jim Bunning (R-KY), Elizabeth Dole (R-NC), Hillary Rodham Clinton (D-NY), Evan Bayh (D-IN), Christopher Dodd (D-CT), Herb Kohl (D-WI), Debbie Stabenow (D-MI) and Carl Levin (D-MI) are sponsoring bipartisan legislation (S 1586) to impose an across-the-board 27.5% tariff on Chinese imports in an effort to reduce China's currency advantage.

On a related note, the Bush Administration filed the first complaint against China in the World Trade Organization - the latest sign of mounting US-Sino trade tensions amid the election-year furor over jobs lost to foreign competition. The complaint alleges that China violated global trade rules by giving a tax break to domestic producers of semiconductors that it does not give to firms exporting such products to China from abroad. Until this case, no nation had lodged a complaint against China in the WTO which Beijing joined in late 2001.

The move is part of a broader administration strategy to counter charges by Democrats that President Bush's free-trade policies have contributed to an exodus of American jobs overseas. Zoellick and other Administration officials have depicted themselves in recent weeks as aggressively prodding other nations to open their markets. The effort has especially been focused on China and India, whose low wages and rising competitiveness have fostered much of the anxiety about job losses.

The Administration and USTR have also announced the creation of a separate Office of China Affairs. The office, for which Congress provided additional funds, will have staff dedicated to handling trade issues with China. Charles Freeman, a Deputy Trade Representative in the North Asia office, was named as acting Assistant Trade Representative to lead the new office.

Finally, the AFL-CIO has filed a petition under US trade law seeking stiff tariffs on Chinese imports, on the grounds that "repression" of workers in China constitutes an unreasonable trade practice. US manufacturers are planning similar complaints against China's currency regime.

Two Groups File Scrap Petition

Two metals-industry groups filed a petition with the Commerce Department to restrict exports of copper scrap and copper-alloy scrap, saying China's rising imports from the US have caused shortages and price increases. The Copper and Brass Fabricators Council and the Non-Ferrous Founders' Society stated that their members are having difficulty obtaining raw materials and managing price increases and believe export restrictions would help control domestic supply.

The Commerce Department has 105 days to determine whether to impose temporary monitoring and export controls and 45 days more to publish final regulations and any possible relief.

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