This Time, Bill to Raise Yuan Might Pass

By Peter S. Goodman
Washington Post Staff Writer
Wednesday, August 1, 2007

It has become a Capitol Hill ritual: A few senators, always including the New York Democrat Charles E. Schumer, introduce a bill to punish China if its leaders do not raise the value of the nation's currency. Photos are taken, news releases are issued, but nothing really happens.

This year, the atmosphere on the Hill is markedly different. Powerful senators from both sides of the aisle, Schumer among them, are pushing two bills that threaten retaliatory action if China does not budge. For the first time, the idea is gaining broad support. The bills are moving swiftly through the Senate, and many analysts expect one will pass.

That prospect set off alarms this week within the Bush administration. Led by Treasury Secretary Henry M. Paulson Jr., the administration has prescribed diplomacy in place of strong-arm tactics, cognizant of the tendency of China's leaders to stiffen in the face of outside pressure. The administration yesterday pleaded for patience and raised the specter of a damaging trade war if Congress moves on the bills.

In a letter to Senate Majority Leader Harry M. Reid (D-Nev.), three members of the Bush Cabinet -- the Treasury secretary, Commerce Secretary Carlos M. Gutierrez and U.S. Trade Representative Susan C. Schwab -- urged rejection of the Senate bills, calling them "the wrong approach."

The bills "would substantially weaken the position of the United States in our ongoing efforts to achieve essential economic reforms in China and around the world," the letter said. "At a time when U.S. exports are growing globally, such legislation also exposes the United States to the risk of 'mirror legislation' abroad and could trigger a global cycle of protectionist legislation."

The administration unleashed its admonition as Paulson visited China once again, pursuing his favored course -- high-level talks with Chinese counterparts on a range of trade issues. Paulson has maintained that this Strategic Economic Dialogue remains the best channel for persuading China to allow its currency to float freely and to respect the norms of international trade.

Since the dialogue was launched in December to fanfare in Beijing, however, the main achievements have been minor deals, such as additional airline routes and promises of more talk. Growing numbers of lawmakers from both parties have joined a chorus of aggrieved manufacturers and labor unions, who maintain that China artificially depresses the value of the yuan to keep its goods unfairly cheap on world markets, costing American jobs.

"The current dialogue isn't working," Sen. Charles E. Grassley (R-Iowa) said yesterday in a statement. "China's progress on currency modernization has been glacial."

In July 2005, China raised the value of the yuan by 2.1 percent and promised to allow it to float more freely. Since then, the yuan has increased by only another 7 percent against the dollar. Some economists say it remains undervalued by as much as 40 percent.

Last week, the Senate Finance Committee adopted a bill sponsored by the panel's chairman, Sen. Max Baucus (D-Mont.), along with Schumer, Grassley and Sen. Lindsey O. Graham (R-S.C.) that would direct the Treasury to coordinate with central banks worldwide to cancel the effects of China's undervalued currency.

The Senate Banking Committee is scheduled to begin detailed work today on a bill sponsored by its chairman, Christopher J. Dodd (D-Conn.), and Sen. Richard C. Shelby (R-Ala.) that would compel Treasury to formally accuse China of currency manipulation, triggering government consultations and potential complaints with the World Trade Organization or the International Monetary Fund.

China argues that it has been cast as scapegoat for the demise of U.S. manufacturing jobs, a point underscored in an editorial in Monday's state-run China Daily. "The new U.S. bill tends to mislead its people into believing that protectionism can be an answer to its economic woes," it said.

China portrays itself as a poor country pursuing policies aimed at boosting exports to create jobs for millions of peasants who are streaming into cities.

Paulson began his latest China visit in the western province of Qinghai, one of the country's poorest. China's vice premier, Wu Yi, began a meeting yesterday with Paulson by expressing hopes that his Qinghai stop would highlight her country's vulnerabilities.

"I'm very happy that you've seen an area that is, relatively speaking, lagging behind in China so as to obtain a more complete picture of my country," Wu told Paulson, the Associated Press reported. "I'm sure your visit to Qinghai province will enrich the materials you present in future testimony before the U.S. Congress."

In years past, China currency bills in Congress were designed to capture headlines more than votes, analysts say, threatening punitive tariffs that would conflict with international trade agreements the United States has signed.

This year's proposals are calibrated to attract broader support by softening the threat and involving international bodies. In years past, the leading currency bill threatened across-the-board 27.5 percent tariffs on all Chinese goods. The new bills would permit sanctions, but only after significant consultation between the two countries.

"It's a much more conciliatory batch of bills than their predecessors," said Gary C. Hufbauer, a trade expert at the Peter G. Peterson Institute for International Economics in Washington. "It's not slamming the hammer. It's kind of turning the screw."

Some analysts expect that this fall, as the election season heats up, one of these bills will gain approval, possibly by the two-thirds majority required to override a presidential veto.

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