Forcing China to Play by the Rules
Submitted by Congressman Tim Ryan on Fri, 03/09/2007 - 9:04am.
International monetary policy may not exactly lend itself to 30-second sound bites, but what if I told you we could potentially create 5 million new jobs and bring $500 billion in investment to our economy just by redefining currency misalignment as an illegal subsidy?
For years, the People’s Republic of China has defied international trade laws by artificially undervaluing its currency. While China is not the only country to manipulate its currency, it is the most flagrant violator. This manipulation of the Yuan has enabled Chinese exporters to sell their products in the United States 40 percent cheaper than their American counterparts and squeeze U.S. manufacturers too small to move their operations to China (as the large multinationals have done.)
In response to China’s continuing failure to comply with international trade laws, Congressman Duncan Hunter (R-CA) and I have re-introduced legislation to provide domestic manufacturing companies with recourse through U.S. trade laws when they are injured by foreign currency misalignment. When the bill was introduced last Congress, we had 178 cosponsors from both political parties.
The Fair Currency Act of 2007 will provide injured U.S. industries with effective remedies against nations that have misaligned currencies such as countervailing duties on imports which would make it more expensive for a nation like China to export goods to our shores. Quite simply, this legislation seeks to level the playing field and make trade fair for American companies.
There are basically four elements to the bill:
1) It defines currency misalignment as a prohibited export subsidy
By doing this, we bring currency misalignment under the umbrella of things the WTO doesn’t allow. We are saying that intentional or even unintentional currency misalignment is just as bad as imposing high tariffs on computers or huge government subsidies to car companies to artificially prop up industry. We also make it explicitly clear that ANY country that attempted to use this sort of currency trick would be subject to repercussions.
2) It holds China accountable for unfair misalignment practices
We make it clear that the Secretary of the Treasury would be allowed to respond to egregious currency misalignment. In the case of China, if their currency valuation allows them to sell products in the U.S. with a 40% advantage, then we can slap a duty on Chinese imports to wipe out that advantage. This is the meat and potatoes of what we are trying to do.
3) It helps protect our national security and defense industrial base
One of our government’s first responsibilities is to protect us and the first step in that process is being able to supply our own military. This bill would make sure that the Department of Defense never buys steel from abroad when we can produce plenty here.
4) Finally, this bill would require the Secretary of the Treasury to take action.We make sure that the Secretary of the Treasury analyzes exchange-rates twice a year to look for seriously undervalued currencies this way we will NEVER get into a situation such as the one we have with China again.
Last year, the overall U.S. trade deficit was a record-setting $764 billion in 2006, with the China portion also setting a record at $233 billion. In the past six years, our country has run a $2.6 trillion deficit in manufactured goods, which translates into the loss of three million good paying jobs. Congress and the President have a responsibility to act now to reverse this trend. The Fair Currency Act of 2007 can begin to make that happen.
Democrats and Republicans, business interests and labor, free traders and fair traders from all over the country have come together on this legislation because they know that American workers are the most skilled, productive and dynamic producers in the world. Our ability to compete in the global marketplace is being unfairly compromised by currency tricks that violate international trade law. U.S. industries and their workers can compete with China and other emerging economies if all countries play by accepted international rules. I am trying to give us a fair shake.
apparently
Submitted by redenemy on Fri, 03/09/2007 - 11:21am.
No one wants to talk to the electeds. No one said boo when Rich Cordray and Judge O'Neill stopped by either. If you can't start a fight with them, and you can't talk about baskets, folks kinda ignore it for whatever reason.
Red
Submitted by bonobo on Fri, 03/09/2007 - 11:57am.
Truth be told, I do hold myself to a higher standard when commenting on electeds' posts. Perhaps if you gave folks such as Mr. Ryan a basket to break the ice...?
Electeds are people too
Submitted by redenemy on Fri, 03/09/2007 - 12:25pm.
is going to be my next campaign I think. I don't think the grown ups expect us to suddenly change our behavior when they show up, they come around and post to be, you know, "someone you could sit and have a blog with." Although it's true that I don't give them baskets, do I? Should I change that?
Ok Jerid, I'll bite
Submitted by bonobo on Fri, 03/09/2007 - 12:00pm.
I completely agree with your first sentence. The problem is when it comes to the policy question, I don't know... So let me ask a few questions of Mr. Ryan and the community:
1) The Yuan is undervalued against the dollar. Can we get the WTO to go along with the dollar as a global benchmark?
2) Can we get the WTO to recognize our Treasury Secretary's opinion of what constitutes "misaligned"
3) Would this type of policy prevent us from protecting the dollar against big fluctuations?
4) Is our current debt to China in dollars or yuan? It seems to me that having the dollar fall significantly against the yuan would result in a dramatic change in the amount owed. If we owe it in dollars, we effectively wipe out billions in debt, if we owe it in yuan, our long term debt skyrockets. I realize that the proposed punitive tariffs are not going to directly force revaluation, but it seems like that's the intent.
5) The 5 million jobs number comes from a report paid for by Nucor Steel, who describe their philosophy in part as:
Since Nucor brings large numbers of high-paying jobs to areas often ignored by other employers, many states have been eager to recruit the company. This has allowed Nucor to develop long-term relationships with states that are hospitable to Nucor's desire to remain union-free and committed to maintaining a climate conducive to business growth through reasonable tax structures.
I'm not sure I trust these folks much more than the multi-nationals they're competing against. Is that wrong-headed?
So, having said all of that, using my highly limited understanding of macro-econ, I'll say with the same aura of someone who is b.s.'ing their way through a policy discussion, currency manipulation is a barrier to free trade, and one that acts to prevent exports to China, and contributes to labor-cost differentials. At least some things would be better for us if it weren't there. So I'm persuadable. I'm just not persuaded.
jerid,
Submitted by RMC2000 on Fri, 03/09/2007 - 4:10pm.
asking most people to understand foreign currency exchanges and then comment intelligently is a tall order. it's easy to say which presidential candidate you like. it's harder to offer an opinion on whether the yuan should be pegged to a basket, how that basket should be weighted, or weather a pure float is best. in other words, to actually know whether this is a good idea, you'd pretty much need to have the CRS on your speed-dial.
RMC, it is our (well my) duty to ask dumb questions
Submitted by bonobo on Fri, 03/09/2007 - 4:34pm.
As you've seen, doing so starts a conversation that is likely to encourage other legislator-led policy discussions. It also makes the eventual offering of more lucid questions such as yours below more likely. So, yeah it's a tall order, but I'd like to thank Jerid for making it.
Welcome Wagon on Trade
Submitted by Jerid on Fri, 03/09/2007 - 4:44pm.
I'm not asking anyone to offer an opinion on the yuan or ask you how you think the basket should be weighted? Nah...Bonobo's got it. We're just talkin'.
You've got a real life, true blue Congressman posting today. He's already commented once. He, and his office, are paying attention to this thread (thank you for abstaining on the welcome basket Red). I asked folks to take the opportunity to talk about these issues today...whether your opinion is educated, out of the blue, or purely unsubstantiated isn't really the issue. I'd just hope some of us would like to take the opportunity.
I'm learning about this stuff as we go too. I don't "get it" all the way...but I know that if my friends and family back in Dayton want to keep their jobs, or if the folks a block away from me in east Cleveland want to make sure food's on the table, or if we want to protect Warren - we better be talking about this stuff.
And don't worry...we've still got plenty of horse race stuff to go round.
Lurkers, come outta the woodwork on this one. Let's make sure the Congressman knows we'll give him a fine reception here and that we're proud of the work he's doing.
(And a big "PS." to everyone out there. Thanks for bearing with me as I've been kinda absent the last week or so. It's been an intense couple weeks on the school end and I've been working on stuff in the background with BSB...I should be back up to normal posting speed either this weekend or come Monday. Thanks again folks).
On a practical level, how do
Submitted by JeanLR on Fri, 03/09/2007 - 11:42am.
On a practical level, how do we "force" China to do anything? Aren't they one of our country's largest creditors? How do pressure them with the debt we owe, and what are we supposed to do if they want to collect?
How did this happen? Who is responsible anyway?
On a side note, I am very happy to read about issues that really matter to us~ the horserace speculation is getting a little tedious, as are the picture inserts (sorry, a little is better than a lot, just imo).
A lot of important people are bothering to see what's going on here in this blog, it's great to have a place that regular people can be heard~ good for us and good for them in power to hear a wider variety of perspective and opinion.
To cover debt the government sells bonds
Submitted by 2010 Buckeye on Fri, 03/09/2007 - 11:55am.
so they would be cashed out in dollars. At least that is how I've always understood it. There's a good chance I'm wrong though, so don't hold me to that.
The government debt can be financed two ways ...
Submitted by BruceMcF on Sat, 03/10/2007 - 11:54am.
... the simplest way to think of it (simplest, mind, not necessarily simple) is the Fed orders the Treasury to issue (or release) a bond when a Treasury check needs to be cleared and there are no reserves in the Treasury account to clear them.
Holding a new asset allows the Fed to create a new liability, which are the new reserves that clears the Treasury check.
If the Fed wishes, they can just hold the bond, so that the government spending directly creates new money. If the Fed is worried about inflation, they will sell the bond on the open market, which will drain the reserves back out of the system again.
So in the end, either the Fed holds the bond or someone in the private sector.
Where the Chinese come in is the fact that they have all of these extra dollars because of the massive trade deficit we have with East Asia. Some of those extra dollars are used to buy government debt, and some is used to buy corporate bonds, which is how the US government and US industry is becomes indebted to the Chinese government (that is, the Chinese central bank, but it does not have the same independence that the US central bank enjoys).
Energize America for Sustainable Energy Independence: http://www.ea2020.org
I concur
Submitted by MarkJablonski on Fri, 03/09/2007 - 1:19pm.
It all sounds great, and I'm glad Congressman Ryan is addressing this issue, but as others have asked, will China and/or the WTO care? Will we actually "risk" pissing Jintao off, even if our concerns are valid? I hope so. Other than Congressman Hunter, have any other Republicans shown any support for this measure?
Response to your Questions
Submitted by Congressman Tim Ryan on Fri, 03/09/2007 - 2:43pm.
First off, I’d like to thank Bonobo, JeanLR and MarkJablonski for engaging on this issue. It’s not an easy one to wrap your head around and I appreciate the opportunity to expand on my earlier points.
1) The Yuan is undervalued against the dollar. Can we get the WTO to go along with the dollar as a global benchmark?
First off, this isn’t a matter of getting the WTO to go along with the dollar as a global benchmark. It already IS the de facto global benchmark. Secondly, currency valuations occur independent of a singular global benchmark. Currency markets pit individual currencies against one another without relation to a singular baseline. This is why the markets are reported as the Dollar against the Pound, against the Euro, against the Yen, Real or any other currency. Valuations are based on the balance between the inflow and outflow of individual currencies due to international trade and investment. Every time an American company buys a product in the United Kingdom, they pay in dollars, which need to be converted to pounds by the banks, which then need to be converted back into dollars the next time a British company buys something in the United States.
In the Chinese case, they have prevented the free floating of the Yuan by setting an unrealistic fixed value, or peg, on their currency so that the Yuan is protected from the increased demand our consumers are putting on Chinese Products. What this ultimately does is force large sums of dollars to get swallowed up by the Chinese Government, which uses them to pay for imports, buy weapons and buy foreign investments including Treasuries in order to sweep away this glut of dollar reserves. While at face value, this sounds like a win for us, in essence all it does is allow us to delve deeper and deeper in debt. It’s the multi-national version of responding to every one of those pre-approved credit card applications you receive in the mail.
2) Can we get the WTO to recognize our Treasury Secretary's opinion of what constitutes "misaligned"
The WTO operates kind of like a World Trade Court. It’s function is merely to set the rules of what free and fair trade are and then mediate disputes between countries so they don’t blow up into trade wars. That being said, this legislation would free the Treasury Secretary’s hand to ACT and we have every belief once that happens, the WTO will agree with our assessment. These currency tricks are INHERENTLY against the mission and purpose of the WTO and they would rule in our favor…should it ever come to that.
3) Would this type of policy prevent us from protecting the dollar against big fluctuations?
The answer is both yes and no. When currency markets function properly, there isn’t room for big, sudden fluctuations because it is all based on trade balance and investment. Furthermore, since the U.S. Dollar is one of the key currencies used for balance of trade all over the world, we are further buffered by that sort of thing happening. On the flip side, when currencies are pegged together, there is NO room for fluctuation because you are dealing with fixed rates of exchange. I am willing to give up a little of the security of having pegged currencies in order to fix a trade balance that has cost America three million jobs and hundreds of billions of dollars in economic production a year.
4) Is our current debt to China in dollars or yuan?
It seems to me that having the dollar fall significantly against the yuan would result in a dramatic change in the amount owed. If we owe it in dollars, we effectively wipe out billions in debt, if we owe it in yuan, our long term debt skyrockets. I realize that the proposed punitive tariffs are not going to directly force revaluation, but it seems like that's the intent. The Dollar wouldn’t fall against the yuan, the yuan would STRENGTHEN in relation to the dollar.
Furthermore the yuan is NOT a convertible currency, which means that it cannot be used in international transactions. That means that all our debt to them is in dollars. Also, realize that this isn’t punitive, we aren’t trying to punish China here, we are trying to alleviate an artificial and unfair trade advantage that China has created for itself. That is the only reason for the countervailing duty law. The amount of the duty will vary directly with the amount of China’s undervaluation.
China, in the end will determine the size of the duty based on their willingness to revalue their own currency.
5) The 5 million jobs number comes from a report paid for by Nucor Steel, who describe their philosophy in part as: Since Nucor brings large numbers of high-paying jobs to areas often ignored by other employers, many states have been eager to recruit the company. This has allowed Nucor to develop long-term relationships with states that are hospitable to Nucor's desire to remain union-free and committed to maintaining a climate conducive to business growth through reasonable tax structures. I'm not sure I trust these folks much more than the multi-nationals they're competing against. Is that wrong-headed?
Regardless of who paid for the study. I stand by Dr. Morici’s assertions. He is one of the foremost authorities in the world on currency misalignment and I have personally consulted with him through this process. I find his analysis insightful, compelling and very credible.
6) On a practical level, how do we "force" China to do anything? Aren't they one of our country's largest creditors?
How do pressure them with the debt we owe, and what are we supposed to do if they want to collect? Yeah, we can’t force China to do anything, but realize that they need us just as much as we need them right now. This is the WORLD’S most crucial trading relationship. Chinese pragmatists realize that this is an unsustainable relationship for them and us because, as we saw a few weeks ago, their economy is moving towards an over boil that threatens the stability of the entire world’s economy. The other thing to realize here is that we aren’t being unreasonable. We are asking them to abide by the rules they agreed to when they joined the WTO a few years ago. The end result of all of this is simple: China will do what is right because they know if they don’t their economy will suffer just as much, if not more than our own.
7) How did this happen? Who is responsible anyway?
Well it is a perfect storm of sorts actually. Poor trading agreements in the 90’s and early 2000’s that we have been fighting set the stage for it. The value of the yuan and ascendancy of China as an economic powerhouse capable of meeting American consumer needs is the heart of it, and finally the fiscal strain of the President and the previous Congresses’ HORRIFIC spending practices fueled it. Throw in the housing boom and credit debt that the American people have used to keep a robust demand for finished goods and that’s pretty much how this happened.
8) Other than Congressman Hunter, have any other Republicans shown any support for this measure?
In addition to Congressman Hunter, we currently have 26 Republican Congressional members signed up as Co-Sponsors.
Once again, thanks a bunch for all your questions! I hope this helps explain the bill a little further! Congressman Ryan
Congressman Ryan, Thanks
Submitted by bonobo on Fri, 03/09/2007 - 4:04pm.
As I feared, some of my questions were based on ill-informed premises, and I appreciate that you didn't condescend when explaining that.
The common thread to my remaining questions is more basic: As you say, the Chinese know that this is an unstable situation. As an academic, I trust that Dr. Morici would understand my hesitancy to accept privately funded research that has not been peer-reviewed, but granting that he is an authority, he says that suddenly converting to a free-floating yuan would be calamitous. Even in a more orderly transition, interest rates would rise and the housing market would probably suffer in the short term.
Will the possible short term upheavals jeopardize the long-term benefits? Is there a way to guarantee a smoother transition?
Congressman Ryan...
Submitted by RMC2000 on Fri, 03/09/2007 - 4:04pm.
Congressman Ryan,
A few questions:
If this bill passes, how do you expect global markets to respond?
Would this bill invite currency arbitrage at a volume heretofore unheard of?
If so, does the risk of significant dollar and yuan instability justify the perceived benefits?
I appreciate you taking the time to post your ideas on this website and look forward to your response.
Thanks
Submitted by MarkJablonski on Fri, 03/09/2007 - 5:22pm.
Congressman. I know I speak for all BSB readers when I say that I appreciate your taking the time to engage and inform us.
True story...
Submitted by Woodguy on Sat, 03/10/2007 - 3:51am.
Today my daughter and I stopped at a Cracker Barrel restaurant for lunch and had to hang around their "country store" for a few minutes before we got seated.
They had these gawd awful "cowboy hats" that said (and I quote) "Toby Keith Authentic American."
But when we looked at the tag inside it said:
(wait for it)
"Made in China"
congressman
Submitted by bryan on Sat, 03/10/2007 - 10:47am.
so, when are you announcing your run for the us senate? cuz i think you might find a few supporters around here (and just as many campaign workers!)
Its the massive trade deficit ...
Submitted by BruceMcF on Sat, 03/10/2007 - 11:46am.
The total dollar outflows equal the total dollar inflows ... the Chinese don't print any dollars, so the dollar outflows are where the dollar inflows come from.
Transactions can be current ... trade, income, direct transfers ... capital ... loans, buying property, buying shares ... or official ... one central bank printing money to buy the currency issues by another central bank.
Now, we have a massive trade deficit, in historical terms, and the biggest part of that is with Asia and the Western Pacific Rim.
That means current outflows (paying for imports from overseas) are substantially bigger than current inflows (payments for our exports).
That means there is an equally massive capital plus official inflow. That is the borrowing from China privately and the buying of US dollars with Chinese yuan that helps keep the rate of the current low.
If we correct the trade deficit, we correct the out of whack borrowing.
I will have to say that when I first read this entry, I was completely asleep at the wheel as to who wrote that, since my first reaction was, "I have to bring this to the attention of my Congressman" (that is, Tim Ryan). However, somehow I think he's already read it!
Energize America for Sustainable Energy Independence: http://www.ea2020.org
China
Submitted by JeanLR on Mon, 03/12/2007 - 6:11am.
A couple years back, advocates of granting China permanent MFN status claimed certain benefits from this policy approach. They argue that in recognition of China's importance as a "partner", that this yearly review process is unnecessary, particularly because China would be more influenced with our active engagement rather than a "confrontational" approach of review and judgment.
They argued that sanctions and restrictions designed to change the human rights situation in China actually "punish" the wrong people of the society, and that individuals in China and in the US would benefit from "free trade", and that to deny that opportunity is to deny freedom and hope for personal improvement to those people.
People who argued against said that China was already not "free" or "fair" trading, and that they had little reason to comply with any condition if it contradicted their plans. They said that China would continue accruing dollars unfairly and using that clout to increase their military. They said that the yearly review of China keeps some leverage to check their activities.
How many years after the Tianamon Square massacre was it before China was first given a normalized trade status, and how was this justified? It seems that one argument for granting permanent status was indeed true, that we might as well because they were approved every year anyhow.
Remember the students? They had a statue of liberty they made, the "Goddess of Democracy", it was an historic moment for the world, all those students bravely standing, camping, singing, speaking out. They had such earnest hope, they felt that the power of reason would prevail, that they could convince thier Leadership with ideas and principle, and they thought that the world was on thier side.
I wonder what kind of trading partner China would be today had those events taken a different turn, what would have happened if China's leaders weren't so confident that all would be forgotten.
Thousands Riot in China
Submitted by JeanLR on Mon, 03/12/2007 - 1:01pm.
Thousands Riot in China Reuters Mar 12, 2007
BEIJING—Thousands of Chinese farmers and laid-off workers rioted in central China, attacking police and smashing squad cars, a local official said on Monday, the latest in a string of violent demonstrations. Nine police cars were burnt during the riot on Friday in the central province of Hunan in which 20,000 people clashed with about 1,000 police armed with guns and electric cattle prods, a local official told Reuters. ...
...A widening gap between rich and poor, corruption and official abuses of power have fuelled a growing number of demonstrations and riots around China, often sparked by seemingly minor issues.
The government has said the number of "mass incidents" in the countrya term that includes protests, petitions and demonstrations–was about 23,000 last year. ...
http://en.epochtimes.com/tools/printer.asp?id=52733
Chinese Regime to Use Military to Suppress Protesters
http://en.epochtimes.com/news/6-11-20/48361.html
Boxun News
Unbiased information resources about China and the World
Human Rights Watch
Oh, c'mon
You've got a Congressman posting on the site...talking about something we HAVE A REASON to care about. I know it's no horse race, or prezzie comment, or whatever...but whadya think about all of this?
Is this sound policy?
Can we really try to hold China accountable when they're holding the purse strings?
Do you think we're actually going to get some trade policy passed that helps Ohio now that the DEMS are back in town, or are they going to screw the Buckeye State just as much as the GOP when it comes to our jobs?
Whadya think. Huh huh huh?