China Currency Problems Go On Trial In The House

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The Obama Administration has hoped to avoid an attempt by Congress to seize the ability to negotiate with China on the value of the yuan. It has almost always been the province of the Treasury to decide if another country has been fair in its trade policies. But China has not kept what many members of the House and businesses leaders believe was a promise to allow its currency to trade in the open market and be priced accordingly.

The House Ways and Means Committee will take up the issue of the yuan’s value and China’s promise in hearings that will begin today. The statement by the committee before the hearings begin says:

China has allowed the RMB to appreciate less than one percent since China decided to allow exchange rate flexibility more than a month ago, on June 19.   The purpose of this hearing, which will take place almost three months after China announced that decision, is to consider whether China has made material progress in allowing appreciation of the exchange rate and what action Congress and the Administration may need to take to address China’s exchange rate policy and its effect on the U.S. and global economic recoveries and on U.S. job creation

The announcement says nearly everything that a observer would need to know about intent. China has kept an unfair advantage in trade with the US, and it has cost many Americans their jobs. Perhaps as telling as anything else about the hearing is that it is being run by Ways and Means Chairman Sander Levin, a member of the President’s own party. Among those who will testify is Leo W. Gerard the International President of the United Steelworkers. He is not likely to be sympathetic with China’s position on its currency.

The hearings will not end in one day. A second day has been set aside for questions the committee wants to pose to Timothy F. Geithner, the Treasury Secretary and architect of the current policy regarding  how the US government deals with China on currency and trade issues.

The Chinese would do well to watch the proceedings carefully. They are nothing other than a threat to Geithner and the Administration that if they fail to take up the issues of lost jobs and the trade imbalance, then Congress will. And Congress could pass a series of laws that lay out rules for trade with China. It is another question whether the Administration could veto those or not. But a veto would tell a number of labor groups that support the Democrats that the President is not willing to stand up to the People’s Republic on a critical issue.

The proponents of restriction of Chinese trade may not have thought  their position all the way through. Where will the cheap goods that improve the margins of US retailers and keep prices down for consumers come from? Do American shoppers have the will to live with shortages and higher prices? Is the federal government willing to deal with the remote possibility that China will no longer buy debt issued by the Treasury?

China has not moved much more than an inch on the yuan issue, and it is the lack of what could be a very modest move beyond that which may cause the equivalent of an old-fashioned trade war.

Douglas A. McIntyre