Congress to press China over its currency policy

Democrats in Congress have been pushing an ambitious trade agenda, promising to assist displaced American workers and reduce the trade deficit. Now they’re taking on the global currency market -- vowing to pass legislation to punish China and other Asian countries for undervaluing their currencies.

The unusual move by Congress to meddle in foreign exchange markets is bound to please labor unions, manufacturers and other businesses that are struggling in the global economy. But many Republicans and Wall Street financiers oppose such intervention.

Labor and small-business leaders joined economists Wednesday to tell a rare joint hearing of three House subcommittees on trade, energy and commerce that China’s government competes unfairly by pursuing an aggressive policy of currency undervaluation, keeping the yuan low to ensure a price advantage for Chinese goods.

One economist urged Congress to act quickly to level the global economic playing field. “The risk of inaction is much greater than the risk of decisive, progressive action,” said C. Fred Bergsten, director of the Peterson Institute for International Economics and a former Treasury Department official.

Bergsten said the yuan needed to rise about 35% against the dollar during the next few years to reduce the annual U.S. current account deficit by about $150 billion.

He noted that the U.S. trade deficit hit $836 billion last year, a historical high, including a $233-billion deficit with China alone.

Although the Bush administration has been trying to persuade Chinese leaders to voluntarily adopt a more flexible currency, it acknowledges that it has made little progress. Mark Sobel, deputy assistant Treasury secretary for international monetary and financial policy, testified Wednesday that the administration was frustrated with negotiations.

More discussions are due during a U.S.-China “strategic economic dialogue” May 23 and 24 in Washington, led by U.S. Treasury Secretary Henry M. Paulson Jr. and Chinese Vice Premier Wu Yi.

Sen. Charles Schumer (D-N.Y.) and other senior Democrats have filed several pieces of legislation this year to combat China’s currency undervaluation to varying degrees, but Congress has yet to take them up.

On Wednesday, Rep. Sander Levin (D-Mich.), who chaired the joint hearing, focused on a proposal by Rep. Duncan Hunter (R-El Cajon) and Rep. Tim Ryan (D-Ohio) favored by manufacturers. The legislation would slap tariffs on countries whose industries benefit from currency manipulation and force the Bush administration to hold China accountable for violating past trade agreements that bar currency manipulation.

It would be a radical move for Congress, which has rarely attempted to legislate changes in currency markets, said Peter Morici, an economist at the University of Maryland.

But Morici said Congress was well equipped to grasp the risks of currency manipulation to the U.S. manufacturing sector and to shape and evaluate legislation. He said it would be akin to writing a complex tax package.

“They don’t have to be international economists to vote for this,” Morici said.

Although forcing the Chinese and other Asian governments to adjust their currencies would raise prices and interest rates for U.S. consumers in the short term, some economists said it would reduce the trade deficit and increase the market for U.S. goods in the long run, mitigating the initial costs.

“This is not something the markets can fix because the markets are being thwarted by other countries,” said Thea Lee, the AFL-CIO’s policy director in Washington.

Wall Street financial experts disputed such claims Wednesday, saying the costs of such legislation would far outweigh the benefits. They warned that Congress was overstepping its bounds by trying to regulate foreign currencies, and would harm both American consumers and fledgling open markets in China.

They said the best way to reduce the trade deficit was to encourage Americans to save more and borrow less through measures such as a consumption tax.

“The United States runs trade deficits not because it is victimized by unfair competition from China or anyone else but because it suffers from a chronic shortfall of domestic saving,” said Stephen S. Roach, chief economist at Morgan Stanley, calling legislation such as the Ryan-Hunter bill a “policy blunder of monumental proportions.”

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molly.hennessy-fiske@latimes.com