- The Washington Times - Thursday, October 14, 2010

Senate Finance Committee Chairman Max Baucus warned a Beijing audience Thursday that the Senate is ready to move on legislation after the midterm elections that would penalize China for manipulating its currency to gain an advantage in trade.

The influential Montana Democrat’s comments after meeting with China’s vice president and central bank governor came as the U.S. government announced that the U.S. trade deficit with China surged 8 percent to a record $28 billion in August — the latest in an explosion of imports from toys to televisions that has aggravated tensions with the Asian giant this year.

“We are at a turning point in our relationship with China,” said Mr. Baucus, calling China’s policy of linking its currency to the U.S. dollar rather than allowing it to appreciate “a persistent thorn in the side of our relationship” that is hurting growth and employment in the United States.

Economists estimate that Chinese-led imports subtracted about 3 percentage points from the U.S. growth rate in the second quarter, and will cost the American economy another 1 percent of growth in the summer quarter. That has kept growth in the U.S. at tepid levels between 1 percent and 2 percent.

While the currency controls are not the only reason China has made major inroads into U.S. markets in the past decade, they are increasingly fingered by legislators and economists alike as causing a distortion in trade.

China must move to allow its currency to appreciate immediately in order for us to move forward,” said Mr. Baucus, whose committee has jurisdiction over trade legislation.

The Senate is “poised” to pass legislation like the bill passed by the House last month to allow the Commerce Department to impose tariffs on Chinese goods if it determines that Beijing’s currency policies act as a kind of subsidy in individual trade cases, Mr. Baucus said.

Even more sweeping versions of the bill have overwhelmingly passed the Senate, but have never cleared Congress as the administration and congressional leaders sought to avoid a trade war between the world’s two biggest economies.

“We can go down the path of division and discord, or we can work together to find mutually beneficial solutions,” Mr. Baucus told his Chinese hosts, Vice President Xi Jinping, Commerce Minister Chen Derning, and Yi Gang, the chief regulator of China’s currency at the People’s Bank of China.

China in June instituted a more flexible currency regime that allows some appreciation, but so far the renminbi, or yuan, has gained only about 2.5 percent against the dollar — not enough to satisfy critics in Congress. Mr. Baucus asked Mr. Gang to submit “a timeline on meaningful appreciation” Thursday.

A stronger currency would be as beneficial for China as for the U.S., Mr. Baucus argued, helping it to control inflation in imported goods such as oil and copper while speeding its evolution from an export-driven economy to one in which consumer demand is the primary driver of growth.

China’s huge trade surpluses exploded with unexpected force this year after a lull during the recession, raising the profile of the longstanding problem both economically and politically during a contentious election year.

Most economists say the large imbalance of trade — the biggest bilateral imbalance in the world — was a major contributor to the global financial crisis of 2008 and ensuing recession. A substantial portion of the money that fueled the U.S. mortgage and housing booms came from China’s huge surplus of dollars from export earnings, which the nation reinvested in U.S. mortgages and bonds.

As China’s economy has grown stronger and bigger — surpassing Japan to become the world’s second largest this year — its currency should have risen by between 20 percent to 40 percent, economists estimate, if left uncontrolled in world currency markets.

Thus, the currency controls have helped to hold down the prices of Chinese goods for U.S. consumers by about that amount.

The Peterson Institute for International Economics estimates that elimination of the distortion would cut the U.S. trade deficit by about $120 billion a year and create about 500,000 U.S. manufacturing jobs.

C. Fred Bergsten, director of the institute, advocates even more aggressive action to pressure China, such as filing a grievance with the World Trade Organization.

While that risks touching off a trade war with China, he said, “the risks of inaction, including to the international trade and finance system, are greater.”

“We can fight fire with fire,” he said, suggesting the House measure is too weak — “a squeak, not a roar.”

The U.S. could begin a drive to force change by labeling China as a “currency manipulator” in a report expected from the Treasury Department on Friday, he said.

Whether the Treasury will do so is unclear. The White House said Thursday that the Treasury will continue to “put pressure on the Chinese government to live up to its obligations,” but did not specify what the report would say.

Treasury Secretary Timothy F. Geithner has argued that identifying China in the report would yield little benefit and might only serve to irritate Beijing.

The Obama administration, like the George W. Bush administration before it, has sought to resolve the issue through negotiations with China and through international forums like the International Monetary Fund.

But while the matter was the subject of much discussion at an IMF meeting in Washington last weekend, it remained unresolved as China once again vehemently resisted any pressure for faster reform.

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