House votes to pressure China over yuan
With the politically charged issue of unemployment weighing heavily in midterm elections, lawmakers took a big step Wednesday toward punishing China for holding down the value of its currency — a policy the Obama administration and other critics say hurts U.S. companies and workers.
In one of their final actions before returning to campaign in their districts, members of the House voted 348 to 79, with dozens of Republicans joining in support, for a bill that would open the way for the U.S. to slap tariffs on Chinese goods.
But the bill faces an uncertain future in the Senate and the White House because — while offering a tempting political target at a time when many voters are unhappy with the still-troubled economy — imposing sanctions on Beijing risks retaliation that could add to the nation’s problems.
And the fact that Chinese monetary policy makes its products relatively cheaper, and thus more competitive in the global economy, is only one of many factors contributing to America’s huge trade deficits and other problems.
In Wednesday’s House debate, supporters cast the measure as a tonic for the weary U.S. economy and beleaguered small manufacturers, which have been among the most vocal critics of China’s currency and economic policies.
“If we want to turn this country around, we have to do things that are going to resuscitate the middle class in the United States,” Rep. Tim Ryan of Ohio said at a Democratic news conference before the vote.
House Speaker Nancy Pelosi (D- San Francisco), in urging the bill’s passage, said it could help create 1 million American jobs. “So this is about America’s workers. This is about making it in America,” she said.
Nobel Prize-winning economist Paul Krugman has estimated that China’s currency policy — and resulting large trade surpluses — may cost 1.4 million U.S. jobs in the next couple of years.
Threatening to impose higher tariffs on Chinese imports would give Washington greater leverage in pressing Beijing to lift the value of the yuan, supporters of the legislation argued. And reforming China’s monetary policy would be a major tool to rebalance a U.S. economy that has long relied on American consumption of foreign-made goods, they said.
A stronger yuan would make Chinese goods more expensive in the U.S., helping out American manufacturers competing against Chinese suppliers, supporters said. At the same time, American products would be cheaper for Chinese consumers, who would also have greater buying power with a stronger currency.
But major business groups representing a diverse array of trades — including cattle ranchers, Los Angeles freight forwarders and Wall Street firms — lined up against the bill, saying it would do more harm than good for economic growth and job creation.
Despite bipartisan support in the House, the bill faces a much tougher hurdle in the Senate, which could take it up after the Nov. 2 election.
And President Obama would be hard-pressed to sign a measure that would anger Beijing and further complicate a relationship with America’s largest foreign creditor — particularly when penalizing Chinese imports might not yield substantial benefits to the domestic economy.
Although most experts agree that China’s currency, the yuan, would rise if freely traded, it’s far from clear by how much. Analysts also point out that the U.S. has a trade shortfall with about 90 countries, not just China, though the Asian nation accounts for about 40% of the $376-billion trade deficit in goods through July of this year.
“We don’t have a bilateral problem; we have a multilateral problem,” said Stephen Roach, a senior fellow at Yale University and former chairman of Morgan Stanley Asia.
He said a big part of the problem is the low American savings rate, which makes the U.S. economy heavily dependent on foreign investors.
Shang-Jin Wei, a finance and economics professor at Columbia University, said that in addressing economic imbalances with China, American officials would do better to focus on how to boost Chinese consumption rather than its currency value.
If the bill were to become law, Beijing would almost certainly challenge its legality with the World Trade Organization.
In Beijing, China’s central bank posted a statement before the House vote Wednesday pledging to increase the exchange-rate flexibility of the yuan.
The People’s Bank of China had issued a similar statement June 19, signaling its intent to let the value of the yuan drift upward after about two years of pegging it tightly to the dollar. Since then, the yuan has risen 2.1% against the dollar.
American officials have expressed frustration at the slow pace of appreciation, and President Obama voiced concerns directly to Chinese Premier Wen Jiabao last week on the sidelines of the U.N. General Assembly.
The Treasury Department issued a statement noting that the House vote shows that lawmakers have “serious concerns about this issue,” adding that the president and Treasury Secretary Timothy F. Geithner “share those concerns.”
But the Obama administration has been reluctant to put heavy, overt pressure on the Chinese, preferring instead to take a softer, more patient approach as it negotiates with China’s leaders and seeks support not only on economic issues but also vital regional and international political and security matters, such as Iran and North Korea.
Nicholas Lardy, a China expert at the Peterson Institute for International Economics, said the White House was angling to get Chinese President Hu Jintao in Washington for a state visit in January.
“The president is not going to want to sign this legislation just in advance of that potential trip. Hu would cancel,” said Lardy, who doesn’t support the bill. “Other countries could take similar measures against us, so this could be the beginning of a slippery downward slope.”