Switching to More Subtle Tactics on China

Sens. Lindsey O. Graham (R-S.C.), left, Charles E. Schumer (D-N.Y.) said they would postpone a vote on their bill that would impose substantial tariffs on Chinese goods.
Sens. Lindsey O. Graham (R-S.C.), left, Charles E. Schumer (D-N.Y.) said they would postpone a vote on their bill that would impose substantial tariffs on Chinese goods. (By Eugene Hoshiko -- Associated Press)
By Paul Blustein
Washington Post Staff Writer
Wednesday, March 29, 2006

After months of issuing drastic threats aimed at forcing China to scrap a currency system critics call unfair, Congress took major steps yesterday toward adopting a more subtle approach.

Sens. Charles E. Schumer (D-N.Y.) and Lindsey O. Graham (R-S.C.) announced that they would postpone for six months a vote on their bill that would impose substantial tariffs on Chinese goods if Beijing continues to restrain the yuan's rise against the U.S. dollar. They cited signs that China recognizes the need to let its currency rise faster, which would be a welcome development for those who have long complained that Beijing keeps the yuan artificially low to give its manufacturers an advantage in global markets.

"Now that we're on the path to progress, we don't have to fire the so-called nuclear weapon, but can hold it in abeyance," said Schumer, who along with Graham traveled to China last week and spoke at a news conference after meeting yesterday morning with Treasury Secretary John W. Snow.

Also yesterday, Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) and the panel's ranking minority member, Sen. Max Baucus (D-Mont.), unveiled a bill aimed at pressuring China using sanctions that are much less inflammatory than the 27.5 percent tariffs in the Schumer-Graham bill. Under the bill proposed by the two leaders of the Finance Committee, countries with "misaligned" currencies could be denied various privileges, such as being designated a "market economy" by the Commerce Department. China is eager to win market economy status because that would make it harder for U.S. companies to win anti-dumping cases against Chinese exporters.

"Senator Baucus and I hope our bill will offer an outlet for the frustration of many of our colleagues over trading partners that don't meet their obligations," Grassley said at a news conference.

The fading of the Schumer-Graham bill, and the introduction of the Grassley-Baucus bill, marks a significant change in the tenor of the U.S.-China dispute over the currency issue, and it comes as China's president, Hu Jintao, prepares to visit the United States next month. Fears have been mounting that the spat could erupt into a transpacific trade war, with potentially devastating effects on the global economy. That danger appears to have abated, at least for a while, now that lawmakers as senior as Grassley and Baucus have put forward an alternative bill that keeps some pressure on Beijing without resorting to massive barriers against Chinese products.

The new bill "is something China should care about, yet it isn't as potentially dangerous," said Morris Goldstein, a scholar at the Institute for International Economics who has been a vocal critic of China's currency policy. "The levers don't have the potential for tit-for-tat trade retaliation."

The Schumer-Graham bill burst onto the scene a year ago as anger mounted among U.S. manufacturers about China's long-standing practice of keeping its currency fixed at 8.27 yuan per dollar. Based on a range of assertions by critics that the yuan was somewhere between 15 and 40 percent lower than the laws of supply and demand would dictate, Schumer and Graham picked the midpoint of that range -- 27.5 percent -- as the tariff rate that would be slapped on Chinese goods unless the system changed. The bill won the support of 67 senators on a procedural vote in April, an indication of the likelihood that the bill would pass if it came to the floor.

The two senators said yesterday that they remain far from satisfied with the level of the yuan, which has risen about 3 percent since July, when China formally ended its fixed-rate system. But last week's trip to China, they said, has made them optimistic that the nation's leaders are preparing for more significant increases in the exchange rate. They will reverse their decision and insist on a vote if their optimism appears unfounded, they said, although they declined to set a specifics on how high the yuan should rise.

Schumer and Graham have deferred action on their bill in the past in the hope that doing so would enable Chinese leaders to move without appearing to cave in to U.S. pressure -- most notably, right before Beijing's July change in policy. Asked whether Snow had suggested that a move was imminent, Schumer referred the question to the Treasury; pressed, he said, "Stay tuned."

Tony Fratto, a Treasury spokesman, declined to comment except to say that "it was a very good meeting" in which Snow and the lawmakers "agreed that, in addition to the currency issue, economic reforms [in China] need to continue at a steady pace." The administration opposes the Schumer-Graham bill, though the threat of passage has strengthened the hand of U.S. negotiators in talks with Beijing.

The administration has been working with Grassley and Baucus on their bill, which would require the Treasury to take a tougher stance in dealing with other countries' currency policies. It would order Treasury officials to produce reports every six months identifying countries with currencies that are in "fundamental misalignment" with economic conditions, and sanctions would be imposed if six months of consultations failed to produce sufficient change.

Some of the sanctions would barely affect China, however, and one would not affect Beijing at all -- the suspension of financing by the Overseas Private Investment Corp., a government agency that insures U.S. companies against expropriation of their investments abroad. The agency has been barred from offering insurance to companies investing in China ever since the 1989 Tiananmen Square student uprising and subsequent massacre.

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