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By Philip Newswanger, Inside Business - Hampton
Roads, August 13, 2007
Congress wants to punish countries that manipulate currency.
The Senate Finance Committee passed an amended version of the Currency Exchange Rate Oversight Reform Act of 2007 on the eve of the August recess. The full Senate is expected to consider the bill when Congress returns at the end of August.
Should President Bush approve the bill, any country deemed to have a “fundamentally misaligned currency” could be hit with anti-dumping duties. The bill does not spell out what a “fundamentally misaligned currency” is, but the bill implicates China, which manipulates the value of its currency so that it will remain weak against major currencies, such as the dollar.
Sen. Max Baucus, D-Montana, introduced the bill, which was supported by a coalition of Democrats and Republicans, including presidential candidate Sen. Hillary Rodham Clinton, D-N.Y.
Senators Lindsey Graham, R-S.C., and Charles Schumer, D-N.Y., both co-sponsors, introduced a similar measure, though it specifically named China and would have slapped Chinese goods with a 27.5 percent tax if China continued to manipulate its currency.
The bill faltered, in part because the administration insisted that talks with the Chinese would produce results. Since U.S. Treasury Secretary Henry Paulson has parleyed with Chinese officials, the yuan has risen in value, though not enough to curb the huge trade deficit China harbors with America. There is some doubt that parity over time with the dollar would reduce the deficit between the two countries.
Congress, and not so much administration officials, is concerned that the trade deficit will lead to lower economic growth. Democrats in Congress – backed by a few Republicans – expressed concern that the weak yuan has contributed to the exodus of American jobs.
The measure would authorize the Treasury secretary to monitor currencies and to identify a currency that is in “fundamental misalignment” and designate it for priority action if the issuing country engages in specific behavior, including excessive reserve accumulation.
America’s trade deficit with China has mushroomed to $232 billion in 2006, more than double the deficit four years ago. Economists who study the ebb and flow of trade aren’t alarmed by the deficit, so long as China continues to buy U.S. assets with its $1 trillion in cash accumulated by selling goods to America.
Should China stop buying U.S. assets – there’s no indication that will happen – and divert its cash elsewhere, the U.S. economy would take a severe beating, as foreign purchases of U.S. assets such as bonds finance America’s budget.
“This is bad potential legislation,” said Jim Flinchum, a partner in Bay Capital Advisors. “There is no agreement on what ‘fundamentally misaligned’ means, which greatly increases the chances of a genuine trade war.”
Since China started allowing the yuan to float higher last year, it has been doing so at an increasing rate.
An appreciating yuan will do little to dampen U.S. imports from China in the short run, according to Flinchum.
“Frankly, I don’t think they can do it any faster, without increasing their own risk of importing inflation,” he said. “But, this is an election year, and it is fashionable to vote for anything that sounds tough on trade, even if it is dangerous in the long run.”
At the local level, a tax on Chinese goods could crimp plans by developers to put up and fill 2.7 million square feet of distribution space during the next two years. In the event that happens, rental rates will fall and there will be empty warehouses for sale.
Developers and commercial real estate brokers in Hampton Roads often cite the port as the catalyst for building distribution space.
EconomicScenarios.com, a joint product of the Centre for International Economics and McKibbin Software Group Pty Ltd. of Australia, states on its Web site that a U.S. tariff on Chinese goods would do little to reduce the trade deficit. In fact, China might retaliate with its own tax on U.S. goods, further undermining relations between the two countries.
A group labor, agricultural and industrial organization views the currency situation from another angle.
“The China Currency Coalition agrees with many international economists who calculate that China’s currency is undervalued by about 40 percent,” said Meg Mullery, spokesperson for the advocacy group.
“This undervaluation is significant because it effectively levies a tax and therefore increases the cost of U.S. exports to China, while giving Chinese producers an automatic price break on their exports to the United States,” Mullery said. “Producers in China benefit from what is, in effect, a substantial government subsidy, which allows them to enter the global marketplace with a huge price advantage.”
The group and its supporters in Congress want to curtail China’s currency manipulation, saying the policy amounts to a government subsidy and violates anti-dumping and subsidy provisions of U.S. law and World Trade Organization rules.” IB
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