A Shot Across the Bow
Trade bill targets China without mentioning it
Charles Schumer and Lindsey Graham may never be mistaken for Reed Smoot and W. C. Hawley, the congressional sponsors of the infamous 1930 tariff law that kick-started the Great Depression. The much-anticipated trade bill that Senators Schumer, a New York Democrat, and Graham, a South Carolina Republican, unveiled last week is hardly a 21st-century update of Smoot-Hawley, which raised tariffs on some 20,000 imported goods. Their Currency Exchange Rate Oversight Reform Act is a far more subtle and limited piece of protectionist legislation. Without ever mentioning China by name, the bill is obviously designed to push—or at least nudge—Beijing into more quickly raising the value of its currency in hopes of reducing America's $200 billion annual trade deficit with that nation. "China is the elephant in the room," says trade attorney Brian Pomper.
Indeed, this currency bill may represent a tipping point in U.S.-China trade relations, marking the moment when American patience with massive trade imbalances—a surrogate perhaps for fears about outsourcing—finally ended. "This bill shows America is becoming more protectionist," says analyst Greg Valliere of the Stanford Group, an investment research firm.
The stick. Schumer and company charge that China is deliberately keeping the yuan low vs. the dollar to give its manufacturers an unfair edge in global trade. "The purpose of this legislation is to force change," Schumer said at a Capitol Hill press conference. It would do that by giving the U.S. Treasury Department—which refused last week to call China a currency "manipulator"—the tools to take action against nations with merely "misaligned" currencies, a lower hurdle. Once Treasury decided a currency was out of line with its real market value, the top U.S. trade negotiator would have one year to file a World Trade Organization complaint that could result in retaliatory duties or other sanctions.
For trade hawks, this bill doesn't go nearly far enough. "A distraction" is how one manufacturing group described it. But although some trade and currency bills floating around Congress go further, this one is backed by two high-profile legislators as well as the Senate Finance Committee's chairman, Max Baucus of Montana, and ranking minority member, Charles Grassley of Iowa. Plus, its backers claim the support of vetoproof majorities. That may be true, says political analyst Charles Gabriel, but the bill could move slowly because of the "heavy burden of responsibility" that such a landmark law would bring.
The big fear: a market- and economy-rattling trade clash that could escalate into a trade war. Passage would not go "unnoticed by China, [which] could close its own markets," says Jeremie Waterman of the U.S. Chamber of Commerce. Or stop buying U.S. treasury bonds. And despite these risks, a higher yuan might do little to close the trade gap. Even a major revaluing of China's currency would make only a small dent in the overall trade imbalance, says former U.S. Trade Representative Carla Hills. Product assembly might shift from China to, say, Vietnam, to dodge the legislation's curbs. And no U.S. bill will make the Chinese save less and spend more.
The bill could also harm American consumers by pushing up the price of cheap imports, says trade lawyer Michael Marinelli: "There is a mismatch in what they are after and what they are doing."
This story appears in the June 25, 2007 print edition of U.S. News & World Report.
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