AUGUST 2004

Congressional Panel Recommends Tough Line on China's Currency

Members of a congressionally mandated panel blasted the Bush Administration's handling of the US-China trade relationship and recommended that the US take a tougher line with China on its currency policies, its World Trade Organization compliance record, and the subsidies it provides its manufacturers.

The recommendations were included in the second annual report of the US-China Economic and Security Review Commission, which comprises 11 representatives from business, labor, and academia appointed by Members of Congress. The Commission has frequently taken a hard line toward China on trade and security matters.

The bipartisan commission was created in 2000 by legislation granting China permanent normal trade relations. Its mandate is to study the security aspects of the US-China trade and economic relationship.

The report cites three primary causes of the heavy imbalance in the US-China economic relationship:

1. China's fixed currency;

2. Its "mercantilist" policies that include subsidies for its manufacturers; and

3. China's incomplete compliance with its WTO commitments.

China pegs its currency at a value of 8.28 yuan to the dollar, which the commission said gives Chinese manufacturers a competitive advantage over US companies.

On the international front, the European Commission issued its preliminary assessment that China does not meet the European Union's economic criteria for "market economy" status. The Commission cited four principal reasons for this assessment:

1. Excessive state influence in industry decision-making through industrial policies;

2. Inadequate corporate governance and accounting rules;

3. Lack of respect for intellectual property/failure to enforce bankruptcy laws; and

4. Lack of consistent market rules in bank lending.

China's Foreign Ministry expressed exasperation at the EU for expecting China to fulfill its WTO commitments, but at the same time not giving China Market Economy Status. The Ministry has said that this is both unreasonable and contradictory because the private sector, collective sector, and other non-state sectors constitute a majority of the Chinese economy where over 90% of the prices in China are market driven.

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