Slow Boat to China
Current currency realties.


Commerce Under Secretary for International Trade Grant Aldonas has stirred controversy among struggling American business firms with his speech at the East-West Center in Hawaii on August 20. The East-West Center is notorious for its support of appeasement policies towards China, and Aldonas played to that by saying Americans should “resist demonizing China” on trade issues. Indeed, according to the East-West Center press release, Aldonas may have fallen into a “blame America first” posture. He is quoted as saying, “We can’t slip into the category of pointing fingers at them. It may not be China, it may be the home front.”

But the problem is China, and its approach to the world economy.

China is still properly deemed a non-market economy. Though there have been important reforms in China, the one-party Communist state still controls the bulk of the economy. China tightly controls the flow of capital across its borders allowing only partial convertibility of its currency. Foreign-exchange trading on the current account is regulated. The government still directs the allocation of scarce inputs, state-owned enterprises are heavily subsidized and protected, intellectual property is routinely plundered, and the private sector only employs one-fourth of the urban workforce. Beijing’s doctrine is mercantilism, not free trade. Currency manipulation is central to its approach to the world economy, not an exception, and is thus a perfectly legitimate target of American concern.

There were many airy predictions about China “opening up” as it entered the global trading system. But there were also more realistic voices warning that Beijing would resort to new stratagems in pursuit of national advantage in a world economy China sees trade as a battleground rather than a marketplace. Washington must contest China’s predatory actions by negotiating from a position of strength. Decisive action is the only way to gain the respect of Beijing’s leaders in future talks.

It is also the only way to satisfy the demands of the American public that international economic policy meet the needs of domestic growth. As Business Week reports in its August 25 issue, “Without the sharp widening in the trade deficit last quarter, the economy would have grown 1.6 percentage points faster….That extra growth would have been sufficient to support more jobs, especially in the trade-sensitive manufacturing sector.”

When Treasury Secretary John Snow, Commerce Secretary Don Evans, and Labor Secretary Elaine Chao went on their Midwest bus trip to show administration concern about the manufacturing recession, the hot topic at every stop was the Chinese economic challenge. Officials will have to do more than listen to complaints and respond with stock phrases about “fair trade” and the value of manufacturing to the economy if they are to solve a problem that has cost 2.7 million jobs in industry in the last three years. Effective counteraction will require the imposition of countervailing duties to offset Beijing’s undervalued currency and to put teeth into U.S. diplomatic efforts to assure Chinese compliance on a number of pending trade issues.

Secretary Snow wants to approach the matter very quietly. Visiting a Harley-Davidson plant in suburban Milwaukee in late July, he said he was “encouraged by the fact that the Chinese have indicated that they are looking at widening” the allowable fluctuation of the yen. He then warned against escalating the matter into a trade battle. “These are sovereign decisions,” he said, “These are not decisions the United States can impose on anybody.”

It is unknown whether Snow realized that the reason there was still a Harley-Davidson plant to visit is because the Reagan administration acted directly to protect the American motorcycle industry from damaging Japanese imports. President Ronald Reagan approved a Section 201 finding by the U.S. International Trade Commission (ITC) and imposed tariffs on Japanese exports as an act of American sovereignty.

The Chinese response to rising complaints about their behavior has not given much hope that talk alone will change anything. “We believe that a stable renminbi exchange rate is not only in the interest of China’s economic development but also in the interest of Asia and the world,” said Chinese foreign-ministry spokesman Kong Quan at a Beijing press briefing. Commerce Minister Lu Fuyuan told a recent meeting of Asian and European trade ministers that China’s exchange policy will be “determined first and foremost based on China’s own domestic economic needs.” Given the large benefits a booming China is reaping from the current situation, there is no domestic pressure to change.

Article XV of World Trade Organization rules prohibits the use of currency manipulation as an unfair trade advantage. A case against China could be brought before a WTO dispute panel, but that process is very long — a least a year, with an uncertain given the anti-American bias at the WTO. Even if a ruling favorable to the United States emerged and survived on appeal, how would it be enforced? If China resorted to a “dirty float” that merely expanded the range within which it allowed the yen to move, without substantially affecting the current trade pattern, would that constitute sufficient compliance such that the WTO would deny Washington authority to take direct action? The Chinese are very wily at playing delaying games within international organizations.

Even if everything went perfectly for the United States at the WTO, enforcement would still depend on Washington imposing across-the-board countervailing duties. The WTO has no power of its own. Its function is merely to give national governments permission to act in their own interests. Tariffs would have to be in the 40-50-percent range to offset Chinese monetary policy. The United States has the authority to take such action now, under its own laws and in defense of its own interests, and should do so. Until Washington starts to move, Beijing has no reason to take American complaints seriously.

The Bush administration should initiate an investigation with a mandate to determine the most effective way to counter China’s currency manipulation. Several industries have filed individual anti-dumping actions against China with the ITC, but the problem is systemic and requires a comprehensive response by the United States on a government-to-government basis. President Bush should use the special provisions negotiated by President Clinton prior to Beijing’s WTO accession which allow temporary tariffs and quotas to protect U.S. industries from sudden surges in Chinese imports. Those provisions were created because it was expected Beijing would not play fair outside a structured and disciplined system. Events have borne out that expectation and call for an American response.

William R. Hawkins is senior fellow at the U.S. Business and Industry Council in Washington, DC.