The politically potent combination of continued Chinese economic expansion at America's expense and Chinese backing for America's avowed enemies--nuclear-armed North Korea and nuclear wannabe Iran--is certain to fuel protectionist sentiment among American lawmakers, labor leaders, manufacturers, and ordinary citizens.
Monday's news stirred things up. With world attention focused on Pyongang's provocative missile tests and Tehran's likely rejection of Western incentives aimed at ending its nuclear program, China posted a record trade surplus with the rest of humanity--the largest monthly trade imbalance any nation has ever recorded.
Ironically, China's announcement that its surplus in June reached $14.5 billion--a record for the second consecutive month--coincided with the swearing-in of the new US treasury secretary, Henry M. Paulson, Jr. As chairman and chief executive of the globalizing Wall Street investment bank Goldman Sachs, Paulson played a "pivotal role" in expanding the firm's China business, as The New York Times noted. He reportedly made 70 trips to China during his tenure.
Which explains why China's US critics were so critical of Paulson's appointment. Putting this well known China champion in charge of US China business is a little like putting Dracula in charge of a blood bank, they say.
"I'd like to have him (Paulson) be very, very tough on China's currency issues," US Senate Finance Committee Chairman Charles Grassley said in an interview on the US cable television network CNBC.
The Senator was echoing complaints by US manufacturers that China undervalues its managed, or manipulated, currency by as much as 40 percent, giving Chinese companies an unfair price advantage in international trade.
The US Trade Enhancement Act of 2006 (USTEA), which Grassley, a Republican, is sponsoring with Democratic Senator Max Baucus, would seek to "correct for trade imbalances that are created or maintained when a country intervenes in foreign exchange markets in an effort to prevent its currency from adjusting to market forces." Though purportedly not aimed explicitly at China, it would become USTEA's principal target, given its $202 billion trade surplus with the United States in 2005--a 24.5 percent increase over the previous year.
Another bill, co-sponsored by Democratic Senator Charles Schumer and Republican Senator Lindsey Graham, would impose a temporary tariff of 27.5 percent on Chinese goods until China eliminates its unfair trade advantage.
US Senator Olympia Snowe, a Republican, who chairs the Senate Committee on Small Business and Entrepreneurship, responded to China's announcement that its exports in June were worth $14.5 billion more than its imports by condemning China's "unfair trade practices such as currency manipulation" and urging the Chinese government to bring the yuan in line with underlying market conditions."
Snowe said she would continue to press for Senate consideration of the Fair Currency Practices Act, legislation she introduced "to force nations to live up to their treaty obligations and stop undervaluing their currencies."
The proposed legislation has three key provisions. The first would change the criteria by which the Treasury Department is required to enter into negotiations with foreign countries that it labels as currency manipulators. The second would further clarify the working definition of manipulation under the Exchange Rates and International Economic Policy Coordination Act of 1998. The act would also instruct Treasury to undertake an extensive examination of China's trade surplus, with particular attention paid to China's suspect trade data, and report on its findings.
A bipartisan bill proposed by Representatives Tim Ryan, a Democrat, and Duncan Hunter, a Republican, would let US companies petition for duties on imports to compensate for the effect of an undervalued currency from the exporting nation. The bill has the support of the largest US manufacturers' association, the National Association of Manufacturers, despite objections by multinational companies doing business with China.
US steelmakers weighed in Thursday by urging action against Beijing at the World Trade Organization over heavy subsidies to the Chinese steel industry, saying it is growing so fast it threatens global economic stability. The chairman of a large US steel maker told reporters: "Since 2000, we have lost over three million manufacturing jobs in the United States, directly related to these subsidies and directly related to China."
Organized labor has also been active against China. The AFL-CIO trade union federation has filed a petition with the US Trade Representative charging the Chinese government with violently suppressing workers' basic rights as part of a systematic effort to maintain an unfair trade advantage in the global marketplace.
The 301 petition, named after the relevant section of US trade regulations, says China's failure to protect workers' rights amounts to an unfair trade practice that has cost more than a million US jobs. The petition calls on US President George Bush to use his authority under US law to impose sanctions against China and to implement a system to verify compliance with internationally recognized workers'' rights.
Pro-Chinese voices in Washington are clearly concerned. They urge caution, saying a massive currency revaluation in China could hurt US financial markets and the dollar by discouraging China from buying US securities. Opponents of tariffs see America's reliance on foreign capital as the country's Achilles' heel, arguing that by dumping US Treasury bills and other dollar-denominated assets, China, which holds more federal US debt than any other country, could cause the value of the dollar to plummet, plunging the US economy into a severe recession.
All told, foreign central banks, led by China and Japan, hold close to $1 trillion of US Treasury bonds and bills, almost a quarter of the publicly held US debt. If China stopped buying US bonds, or sold them outright, many economists contend, bond prices would fall, and their yields, which move in the opposite direction, would rise, causing mortgage rates to rise, in turn depressing home sales and weakening the economy.
Not everyone agrees that the US is so vulnerable. Former Federal Reserve Chairman Alan Greenspan, no slouch when it comes to monetary matters, has said that while foreign central bank holdings are large, they are actually small compared with the total trading volume in US debt markets, and their sales could be easily absorbed. Moreover, most foreign central bank holdings are short-term bonds, according to Greenspan, meaning maturity of two years or less. Such yields, unlike those on 10-year bonds, tend to be influenced more by the US central bank's monetary policy than day-to-day trading.
Other economists argue that fears of Chinese economic retaliation are overblown because Beijing would also be hurt in the process of destabilizing US markets. If China stopped buying dollars, its currency would rise, hurting exports--the engine driving China's economic expansion.
In other words, China needs the American consumer to keep buying its goods to assure continued job growth and social stability. A financial crisis could trigger a political crisis, possibly leading to the collapse of the regime.
Meanwhile, US consumers could be tempted to take matters into their own hands, so to speak, by boycotting Chinese goods. In principle, they could cause considerable harm by turning against one US company that is most responsible for growing China's economy.
That company is Wal-Mart, of course, the firm that used to proudly promote the "Buy American" motto of its founder, Sam Walton.
Today, at least 70 percent of non-food items sold at Wal-Mart stores have a Chinese component.
Importing an estimated $18 billion in products from China each year, Wal-Mart is China's eighth largest trading partner, surpassing entire countries like England and Russia.
A "Made in China" boycott may seem far-fetched. But North Korean missile launches and threats to "annihilate US imperialism" with nuclear weapons once seemed far-fetched, too.
technorati tags: China
technorati tags: US-China Relations
