House slaps China on currency policy, deepening trade dispute

By Howard Schneider
Washington Post Staff Writer
Wednesday, September 29, 2010; 8:46 PM

The House of Representatives voted Wednesday to punish China for policies that unfairly favor its exports at the expense of the United States and other countries, the latest volley in what is developing as a global battle over jobs and commerce.

The vote, ahead of congressional elections in which economic issues will figure prominently, reflects growing international anxiety over China's policies - and particularly the management of its currency. By keeping the value of the renminbi artificially low against the dollar, China makes its goods cheaper on world markets, encouraging consumers to buy and underpricing competitors from other countries.

Although the threat of congressional action has loomed over U.S.-China relations for years, the lopsided House vote allowing tariffs to be imposed on countries that chronically undervalue their currency represented an escalation. Business groups and some economic analysts warned that the move could prompt tit-for-tat retaliation.

Major countries avoided protectionist steps during the recent economic crisis, and economists argue that a move in that direction now could hurt growth in parts of the world that are doing well, damage corporations that rely on trade and endanger an economic recovery that remains fragile.

Brazilian Finance Minister Guido Mantega said this week that a quiet "currency war" is underway. With capital and investment pouring into the faster-growing Asian and Latin American economies, that is increasing demand for local currencies such as the Brazilian real and making them relatively more expensive. Money is also flooding into China, and if Beijing does not allow the value of the renminbi to rise, other countries might feel they have to keep their currencies cheap as well - or risk losing ground to Chinese manufacturers.

The Japanese central bank intervened this month in the usually free market for the yen and sought to halt a steady rise in its value against the dollar, responding to pressure from its automakers and other manufacturers.

Countries such as Colombia and Peru have also been battling to stem the appreciation of their currencies, by selling off their local money and buying dollars. South Korea and Taiwan have been increasing their holdings of foreign reserves, one signal of an undervalued local currency. And officials in Brazil - whose currency has jumped more than 30 percent against the dollar in the past year and a half - have said they might need to become more aggressive.

The House vote was overwhelming - 348 to 79 - and bipartisan. The rhetoric was sharp as members of Congress slammed the "clique of gangsters" at the head of the Chinese government and argued that the United States was already fighting a trade war with the world's most populous nation. Joint trade between the two countries amounts to nearly $300 billion a year, but it is lopsided: The U.S. trade deficit with China was in excess of $200 billion last year.

Opponents said the legislation, if enacted, could raise prices for U.S. consumers and was more about election-year politics than addressing the trade problems between the two nations.

Similar legislation is pending in the Senate, and Sen. Charles E. Schumer (D-N.Y.) said this week that it will be voted on after the election.

Although the Obama administration has not taken a position on the proposed law, senior officials cite a growing list of trade aggravations with China that go beyond the currency issue. The Chinese government has moved to restrict the purchase of imports by government agencies and has become more forceful in demanding that foreign companies turn over technology and intellectual property as a condition of doing business. It has also limited the export of industrially important minerals.

A senior administration official said it intended to "raise the intensity" on those and other matters even as it acknowledged the possible consequences of an open breach. President Obama spent much of a recent meeting with Chinese Premier Wen Jiabao urging faster progress on currency and other economic issues, and Treasury Secretary Timothy F. Geithner recently said the United States was looking at a "mix of tools " to persuade China to act.

"We have to make sure the outcome here is a system where exchange rates are more in line with market forces and the trading system is strong," said the official, who spoke on condition of anonymity because of the sensitivity of the discussions. Top administration officials have made a series of trips to China this month.

China says that the problem is essentially that the U.S. government and American households borrow too much - and that has nothing to do with the level of China's currency.

The Chinese renminbi is widely considered by economists to be undervalued - perhaps by as much as 40 percent, representing a hefty subsidy for Chinese exports. Chinese officials say they agree the renminbi should float more freely, but they have allowed only a limited and slow appreciation since a new policy was announced in June.

The likelihood of a broader trade dispute is considered slim by economists and other analysts familiar with relations between the two countries. But there is little disagreement that the mood has darkened. Some business groups have argued against openly aggressive action against China, but they also acknowledge that Chinese officials have been making it harder for foreign firms to do business.

When a similar currency dispute arose in the mid-1980s among the United States, the United Kingdom, Germany and Japan, the four allies settled it with negotiations that devalued the dollar and quickly trimmed America's trade-related deficits in half.

No one expects such an easy solution this time.

"The problem is substantial," said Kenneth Lieberthal, head of the John L. Thornton China Center at the Brookings Institution and an adviser on China policy to President Bill Clinton. "It is hard to leverage them."

On the eve of the House vote, a coalition of U.S. business leaders in China cautioned about a possible backlash.

"If we take this step, it will continue a downward spiral," said Timothy Stratford, a Beijing-based partner in the Covington & Burling law firm and former U.S. trade representative in China. "The strategy is not to use barriers and sticks" but focus on competing more effectively against Japanese, German and other companies that face the same hurdles in China that U.S. firms do.

The issue is also testing the ability of organizations such as the International Monetary Fund and G-20 group of nations to make progress on core issues. Both organizations have consistently said that flexible exchange rates are important to the rebalancing effort and central to a well-functioning global economy.

China deflected the currency issue at the last G-20 meeting by promising more currency appreciation. As time has passed with little result, the United States says it is looking to those international organizations to be more forceful.

The IMF was founded to help coordinate world exchange rates, and although its role now is different, Geithner said recently that the agency "has not covered itself in glory" in its handling of China.

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