AWPA Wireline - March 2004

The US trade deficit with China, the currency problem, and trade distorting practices of this Asian trading partner continues to plague trade officials, Congress and the business community.

The Administration

At a critical bilateral meeting between President Bush and Chinese President Hu Jintao in Thailand at the Asia Pacific Economic Cooperation (APEC) forum, the leaders agreed to announce the formation of a currency experts group to accelerate the movement towards a freely floating "yuan." The study group will include visits by US Treasury officials to Beijing.

President Bush also has been dispatching high-ranking officials to China to discuss currency issues and what American businesses consider unfair trade practices. Commerce Secretary Don Evans, on his recent visit to the country, accused the Chinese of creating an "unlevel playing field."

Treasury Secretary John Snow also traveled to China, and pressed the Chinese to allow their currency to float freely. China currently pegs its currency to the dollar at a fixed rate that the administration argues is artificially low, reducing the cost of exports from China and raising the cost of US imports.

But Snow has resisted making a declaration that China's currency practices constitute illegal manipulation and is in violation of a US law against currency manipulation to gain unfair trade advantages (Section 3004 of the Trade and Competitiveness Act). In its annual currency report to Congress, required under Section 3005 of the same statute, the Administration said China's decision to keep its currency tightly linked to the US dollar and not allow it to rise in value did not meet the "technical requirements" laid out in the 1988 law. The law allows economic sanctions that can be imposed on countries found in violation.

The Treasury Secretary told the Senate Banking Committee that the Administration believes negotiations with Chinese leaders represented the best approach to getting Beijing to changes its policies.

Chinese officials have said they want to eventually allow their currency's value to float. But they argue that such a change cannot be made now because of concerns about China's fragile banking system.

The Deputy Trade Representative Josette Shiner, taking a firmer line, declared during a House Ways and Means Committee hearing, that the "honeymoon is over in terms of the waiting period for China to act on some of these trade complaints." She further insisted that the Bush Administration is prepared to bring dispute cases against China at the WTO in the absence of quick progress on some alleged violations. She concluded that the USTR would be making an assessment soon following meetings she has scheduled with Chinese officials.

Congress

The House of Representatives passed, 411-1, a resolution, sponsored by Rep. Phil English (R-PA), that placed the House squarely behind the Bush Administration's efforts to level the playing field with China on trade issues. HRes 414 also pledges that the House will closely monitor progress.

The House Financial Committee's Subcommittee on Domestic and International Monetary Policy, Trade and Technology held a hearing on China's Exchange Rate Regime. Treasury Snow stated at this hearing that the Administration was continuing to press China to move to a flexible currency regime.

The Business Community

The NAM's new Coalition for the Future of Manufacturing (see box) will be focusing on ways to level the international playing field, with particular attention being focused on China.

Businesses are aggressively pushing for some resolution to the China problem, making the growing trade imbalance between the US and China a top-tier campaign issue in key industrial states. The loss of manufacturing jobs in industrial states like Michigan, Ohio and West Virginia has raised the public profile of the trade deficit with China.

Businesses have joined together to form the Fair Trade Currency Alliance, a coalition of trade associations and unions representing manufacturing, agriculture, and labor. They have hired a law firm and intend to prepare a Section 301 petitions urging the Administration to take action against China for its currency practices. The coalition believes that China's practice of intervening heavily to control its currency at a significantly undervalued level ? as much as 49% - against the dollar conveys an artificial trade advantage that is adversely affecting US production and jobs.

The problem, they add, is still solvable but China must reform its currency practices. A section 301 case would provide the Administration with critical leverage in negotiations with Beijing by helping ensure both the necessary time dimension and the specific focus needed to resolve this issue.