Monday, October 04, 2010

US bill on China's yuan is just smoke and mirrors

Business Times - 05 Oct 2010


US bill on China's yuan is just smoke and mirrors

By LEON HADAR
WASHINGTON CORRESPONDENT

JUST as US lawmakers were getting ready to leave Washington and return to their districts where they would be bashing each other as part of the heated midterm election campaigns, they found the necessary political will to provide a rare display of, yes! bipartisan cooperation.

Indeed, the members of one of the most polarised House of Representatives in American history - Democrats, Republicans and Independents, liberals and conservatives, progressives and tea partiers - seem to all come together last Wednesday evening. After all, it was China-Bashing time, which happens to be the most effective way to bring the nation together.

By a vote of 348-79 and wide bipartisan margin, the House passed a bill aimed at penalising China for manipulating its currency, something that China has denied doing. If passed into law - a big 'if' indeed - the legislation would allow the US Department of Commerce to levy tariffs on any 'foreign country' - read: China - that intentionally undervalues its currency in order to boost its exports.

So is this for real? Is Congress really getting 'tough' with China? Are we on the eve of the kind of Sino-American trade war that is craved by the protectionists in Washington and feared by the few remaining free-traders?

Economic analysts continue to debate whether the Chinese are using their exchange policies to undercut the export of other nations, and whether punishing China for its conduct would be helping American exporters.

But among political analysts there is a clear consensus that the move by the House is nothing more than bipartisan political posturing.

And the target here is not the Chinese but the American voters who would be electing the new House next month. Both Democrats and Republicans want to demonstrate to the economically distressed voters, who according to opinion polls seem to be in a somewhat angry, nationalist, if not xenophobic, mood, that: 'Hey, your representative in Washington is not going to allow those Chinese rogues to steal American jobs and destroy the American economy.'

That sounds great. But is probably not going to turn into policy anytime soon. First, the US Senate where free trade enjoys a broader support than in the House - and is therefore not ready to launch a trade assault against China - will not be voting a similar measure before the November elections.

And since in order to get signed by the president and become a law, any legislation needs to be adopted by both the House and the Senate, a failure on the part of the Senators to take action makes it clear that the proposed bill targeting China is for all practical purpose going be buried somewhere on Capitol Hill.

There would still be a small window of opportunity for the Senate to do something in a short lame-duck session that would probably be preoccupied with a debate over the extension of the Bush-era tax cuts that would be convened after the midterm elections and before the new Congress is convened.

But in the unlikely circumstance that the Senate decides to jump on the China-bashing bandwagon - and the House and the Senate are able to fashion a joint legislation - President Obama would still have to sign the legislation.

And after the legislation becomes a law, the Commerce Department would be in a position to decide whether to apply it. To put it in simple terms, the road leading from the passage of the legislation to the imposition of tariffs on China is very long, with plenty of obstacles.

It is possible that the legislation would be re-introduced by the lawmakers in the newly elected Congress, which is expected to include more Republicans, including many who are backed by the Tea Party movement. In fact, most pollsters are predicting that the Republicans will take over the House.

But notwithstanding the populist rhetoric of the tea partiers, the Republican leadership in Congress will probably be less inclined to promote anti-business protectionist legislation, like the one adopted by the House last week.

That does not mean that the issue of China's exchange policies will not continue to be placed on the Sino-American policy agenda, especially against the backdrop of rising concern that governments could resort to choosing competitive devaluation strategies as a way of helping their weak exporting sectors.

And in any case, the White House and the new Congress would have to find ways to work with the Chinese and other economies to address the problem of global financial imbalances between surplus oriented countries like China and deficit oriented ones like the US.

So, while bashing China may be great election-campaign rhetoric, most US lawmakers recognise that pursuing a trade war with China is only going to make the resolution of these problems even more difficult.



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