23.The Yuan and U.S. Midterm Elections

The Yuan and U.S. Midterm Elections October 6, 2010 | 1212 GMT Astrid Riecken/Getty Images U.S. Sen. Charles Schumer in Washington on June 23 Summary As U.S. midterm elections draw near, economic issues and unemployment are driving Washington to pay more attention to the dispute with China over Beijing’s currency policy. Voter frustration has led U.S. legislators to work harder to pass bills against China, and the administration has signaled that it is ready to increase pressure on Beijing. However, while the dispute will intensify, the United States appears willing to continue on the same path of negotiation rather than try to force China’s hand. Analysis The public uproar surrounding the dispute between the United States and China over the value of China’s currency has died down since the U.S. House of Representatives passed the Currency Reform for Fair Trade Act on Sept. 29. But the dispute has not gone away. The U.S. Treasury Department must file its report on foreign currencies, in which it could formally cite China for currency manipulation, by Oct. 15. U.S. Sen. Charles Schumer has said he will attempt to push for a vote in the Senate during the lame-duck session expected to take place Nov. 15-19 and Nov. 29-Dec. 3. Furthermore, U.S. President Barack Obama’s administration has indicated that the United States will raise its concerns publicly, in league with other international players such as the Europeans, at the November G-20 summit in South Korea in hopes of pressuring China to accelerate its currency reform. The driving force behind the heightened attention to the yuan issue in the United States is not only the conspicuousness of China’s large trade surpluses while the U.S. economy struggles, but also the immediate political concerns ahead of U.S. midterm elections Nov. 2. Unemployment and economic growth difficulties in the United States and voter frustration with incumbent politicians have led to a greater push by legislators to pass the bills against China, whose undervalued currency is thought to negatively affect the U.S. manufacturing sector and employment. China currency bills have bipartisan support — the House vote tally was 348 to 79 in favor of the bill that passed Sept. 29. And the Obama administration, normally cautious on the issue, has in the past few weeks echoed the complaints of the House and Senate to the effect that China has not gone far enough in strengthening its currency since it announced a more flexible exchange rate policy in mid-June (since then the yuan has risen by slightly less than 2 percent). Obama also pressed the issue with Chinese Premier Wen Jiabao on the sidelines of the U.N. meeting in New York and said he would use all the tools at his disposal to encourage China to make bigger changes faster. The administration has thus sent the signal, especially by tacitly agreeing with House leaders to approve the currency bill, that it is ready to increase the pressure. For its part, China has throughout the year conceded as little as possible on its currency policy so as to avoid foreign retaliation while not risking too sudden reform that could have adverse or unexpected consequences for its economy. The situation is therefore set to intensify. The question is whether it will escalate in a controlled manner, with a more or less rocky continuation of the status quo, or whether the United States will make a decisive or bold move to force China’s hand once and for all, which could result in a full confrontation and rupture in relations with China. The answer appears to be a continuation of the status quo, though with an increase in the pitch of rhetoric and the ominousness of threats on both sides. First, the Obama administration could decide to name China a currency manipulator when Treasury Secretary Timothy Geithner releases his twice-yearly report on foreign currencies Oct. 15. The chairman of the House Ways and Means Committee, Sander Levin, has said Geithner ruled out the possibility of doing so during hearings in mid-September. Furthermore, U.S. military and civilian leaders will be visiting China around the report’s deadline, which suggests that the United States will not make a provocative move at that time. Yet excluding China from the report is becoming harder to justify and increasingly unpopular, and election considerations could tip the balance against China. Still, the currency manipulation charge only requires the United States to initiate a new dialogue with China, bilaterally or in league with international organizations, which means that aside from the massive eruption of political vitriol that would result, such a citation would not necessarily cause concrete damage to the U.S.-China relationship. That would depend on the United States’ decision on how to prosecute China in the event that dialogue fails. Since dialogue on the issue has been under way for years, this is not in itself decisive, though Beijing’s expected retaliation to the charge could have unforeseen consequences. Second, the legislative bill against China is not an absolute. The Senate may not have time to vote on it in the short (and legislatively packed) lame-duck session; and if it amends the bill, then a conference would have to be held with the House to reconcile the two bills, again running into time constraints. If the bill is voted on, however, there is a good chance it will pass, given the bipartisan support. This would force the president to decide whether to veto it or to accept it — and because the bill is popular, the president, concerned about his popularity, would not be able to veto it easily. However, the bill was modified in the House Ways and Means Committee before passing the vote in order to make it compliant with World Trade Organization (WTO) measures. The modification made it so that the Commerce Department would still have discretion in determining whether China’s currency acted as a subsidy to any particular good, rather than compelling the department to conclude as much. Thus, even in the event the bill passes, the administration would still have the ability to decide how aggressively to wield the new law against China. Third, the administration may follow up on recent threats to file a claim against China for its currency policy at the WTO, but this would not constitute an aggressive or immediate solution, and possibly not a solution at all. The WTO is not generally considered capable of arbitrating international currency disputes (the United States is pursuing this option because of the International Monetary Fund’s lukewarm response to the yuan issue). Furthermore, the U.S. claim that the undervalued yuan should be considered an export subsidy is more complex than it sounds, raises questions about the specificity of the charge and could prove fruitless if China can bring a stronger case against it at the WTO. Sources suggest that Washington could launch a special kind of suit claiming that China’s failures to live up to WTO obligations have harmed Washington’s expected benefits from WTO membership, but there are few if any precedents for such a suit. The WTO option is not only uncertain for the Americans, it also would take a long time for the final ruling and would involve appeals. Thus, while the United States has several unused options and has shown that it is ready and willing to pursue them, none is intended to force China’s hand immediately. The United States does not appear to have reached the point where it is willing to take bold and unilateral action — imposing sweeping tariffs, for example, that would mar the prospects of China’s critical export sector — that would force Beijing to move. Washington is struggling with domestic economic circumstances, managing Iran and the Middle Eastern power balance as it withdraws from Iraq, and attempting to reach some kind of acceptable outcome in Afghanistan. The combination of economic doubts and strategic challenges has led Washington to tolerate the current process of ups and downs and negotiations and threats with China over the yuan (and other issues) instead of seeking a more confrontational path. In avoiding conflict, the United States has hoped to get China’s assistance with economic stability, Iran, North Korea, nuclear proliferation and Pakistan. In other words, Washington is seeking more leverage over China without actually using it. Meanwhile, Washington can be expected to continue imposing duties on specific Chinese goods, enforcing trade rules on a case by case basis, and putting pressure on China in other areas — such as by strengthening its ties with China’s neighbors. Ultimately, if Washington becomes convinced that Beijing will indefinitely resist bringing its currency practices in line with international standards, it can be expected to shift to a more confrontational strategy. The timing for this shift does not depend on a few percentage points in the yuan’s exchange rate, but rather on the perceived sincerity and progress of Beijing’s overall reform. The weeks and months ahead of the G-20 summit and Chinese President Hu Jintao’s visit to the United States in January will provide important indications as to Beijing’s concessions and Washington’s intentions. The United States does not appear to have the appetite for a full confrontation on the issue in the immediate future, but eventually — if China proves immovable — it will. Meanwhile, Beijing will use incremental policy adjustments to fend off criticism. In China, this confrontation appears inevitable, so the strategic question revolves around the best way to prepare: accommodation or outright resistance. Accommodation allows China to reform at its own pace and, in keeping with other moves, to make it less dependent on exports to the United States and gradually better prepared for the harder challenges of reform. Resistance appeases domestic displeasure at foreign impositions and could prevent China from getting forced into a risky economic change amid volatile conditions. At present China also seems willing to give just enough to avoid flagrantly provoking the United States, but there are serious questions as to how much room China has left to maneuver in its delicately balanced economy, and resistance is rapidly winning domestic support. Give us your thoughts  on this report For Publication Not For Publication Read comments on  other reports Reader Comments