US shows appetite for action

飞雪寒冰

It all feels rather familiar. Several years of fixing the renminbi to the dollar has brought Beijing under sustained fire from Washington for undervaluing its currency. Senators and congressmen are threatening to hit China with punitive tariffs. It's 2005 all over again.

Back then the threats came to nothing, not least because China allowed the renminbi to crawl higher. But this time they look more serious. In particular, the precision with which retaliation against China is being prepared suggests more willingness to unsheathe the sabre rather than just rattle it.

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So what has changed? One obvious answer is the occupancy of the White House and Capitol Hill. In 2005, the administration of George W. Bush set its face against actions such as currency tariffs, and Republican control of Congress made it less likely. Barack Obama, president, in contrast, has signalled more scepticism towards trade and more urgency to act to reduce subsidised imports, agreeing last year to emergency tariffs on Chinese tyres using a measure repeatedly rejected by Mr Bush.

But Philip Levy, fellow at the conservative American Enterprise Institute, says that by far the biggest change has been the economic situation following the global financial crisis. “Previously, people pointed out that the benefit of the deficit was that the US could borrow cheaply from China,” he says. “Now that the US is in a liquidity trap [where interest rates have lost their power to prompt spending], cheap borrowing is no favour to it at all.”

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Mr Levy adds that as US companies with investments in China are finding it increasingly hard to do business there, the White House now gets less pushback from the business community when it confronts Beijing.

Yet the US continues to face the same problem in trying to force China to allow the renminbi to rise: devising a measure compatible with international trade rules. Charles Schumer and Lindsey Graham, respectively a Democratic senator from New York and a Republican senator from South Carolina, have revived and refined their bill of several years ago.

The earlier version would simply have slapped 27.5 per cent tariffs on Chinese imports, a gross violation of World Trade Organisation rules. The new bill is more subtle, as it would permit exchange rate misalignment to be used in calculating the size of emergency “countervailing duties” imposed on imports deemed to be subsidised. Other potential measures would include opposing more votes for such countries at the International Monetary Fund and forbidding federal government procurement from their companies.

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Significantly, the bill lowers the bar for such measures. While the much awaited currency report from the US Treasury, to be released by April 15, decides whether exchange rates have been “manipulated” for trade purposes, the Schumer-Graham bill merely looks for “misaligned” currencies.

Great doubts remain about the legality of such measures. David Spooner, a former senior commerce department official during George W. Bush's presidency, notes that taking account of undervalued but not overvalued currencies could unfairly inflate the size of emergency tariffs. And it remains far from clear that exchange rate misalignment is an “export-contingent” subsidy as defined by WTO rules.

Some also question the political wisdom of the US going it alone in confronting China over its currency. Dan Price, the senior official on international economics in the Bush White House, says other trading partners may see exports displaced by Chinese production.

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“The US should avoid actions that would reframe this legitimate multilateral concern . . . into a bilateral US-China issue with escalating recriminations on both sides,” he says.

One of the lawmakers at the heart of the debate has similar concerns. Sander Levin, the Michigan congressman who is acting chairman of the House ways and means committee, with jurisdiction over trade, has long been a critic of China and its currency policy. But he warns against precipitate action.

Mr Levin said ways and means committee hearings today should produce “a greater sense of knowledge and a greater sense of urgency” ahead of the Treasury's currency report.

But it remains far from clear they will produce the kind of unilateral action that will escalate this conflict out of heated rhetoric into potentially explosive legislation.