Emad Mekay

WASHINGTON, Jun 22 2005 (IPS) — Four influential Republican members of Congress introduced legislation Tuesday to force China to revalue its currency or face higher tariffs on its exports to the United States.

The bill is the latest move by the United States to curtail cheap Chinese imports, which Washington views as threatening to U.S. workers, industries and corporations. Congress is concerned that Chinese goods are made artificially more attractive and U.S. exports less appealing because the Chinese currency is fixed at an undervalued rate compared to the U.S. dollar.

"Good people are losing their jobs and our economy is taking a big hit because of China’s unfair trade practices, and it’s time we send them a strong message," said Rep. Mark Green of Wisconsin, one of the co-sponsors of the bill.

Reps. Phil English of Pennsylvania, Chris Chocola of Indiana, Robin Hayes of North Carolina and Green announced the legislation, called the Currency Harmonisation Initiative through Neutralising Action (CHINA) Act of 2005.

The proposed law charges that China’s exchange rate may be circumventing rules of the World Trade Organisation (WTO). It also says that Beijing could be in contravention of Article IV of the International Monetary Fund’s Articles of Agreement, which bars the use of currency manipulation to prevent effective balance of payments adjustment or to gain unfair trade advantage.

But the consensus in Washington is that the real reason for the move is the mushrooming U.S. trade deficit, which reached a record 195.1 billion in the first quarter of this year.

According to the U.S.-China Economic and Security Review Commission, the United States’ trade deficit with China increased twenty-fold over the last 14 years, rising from 6.2 billion dollars in 1989 to 160 billion dollars in 2004. As a result, the U.S. Treasury has made several public demands that China float its currency, the yuan.

While some progress has been reported by the Treasury in engaging China on its exchange rate policy, the lawmakers say far more needs to be done.

According to the Republican bill, China could face tariffs equal to the percentage of alleged "manipulation found in its currency." This would come in addition to any existing tariffs on Chinese imports.

The proposed law also requires the George W. Bush administration to clarify existing trade remedies and World Trade Organisation rules that deal with currency manipulation. The lawmakers say they want to see changes that would "reflect modern-day monetary policy".

"As a former manufacturer, I understand the opportunities of free trade," Chocola said. "Without a level playing field, our manufacturers are at a significant disadvantage. This bill results in not only free trade, but fair trade by making sure China plays by the rules."

U.S. moves to pressure China to revalue its currency include a report by the Treasury Department last month which, for the first time, stated that China now has the technical expertise to begin to take steps to float its currency.

The biannual report, "International Economic and Exchange Rate Policies", stated that China would likely be cited for manipulating its currency in the November report if the country failed to take significant action to alter its currency peg.

The majority of U.S. economists have backed official demands for a currency revaluation by China.

"The United States has a very large trade deficit that is not sustainable and China clearly is a big part of the story, (although) not the whole story, and exchange rate is the reason," said Dean Baker, co-director of the Centre for Economic and Policy Research (CEPR). "So I think it’s reasonable for the United States to say we want a different exchange rate."

His analysis is based in part on the view that it would probably be better for both China and U.S. consumers if Bejing revalues its currency rather than face U.S. tariffs.

"With new tariffs, it’ll cost people in the U.S. say, 40 percent more to buy their goods. That additional 40 percent is going to the U.S. government as taxes, whereas if it costs 40 percent more because they revalued their currency, then it’s going, at least to some extent, to producers in China," Baker said.

Other economists argue that blaming China for U.S. trade woes is misplaced and could open up the United States to charges of protectionism, which could carry a hefty cost in the long term.

"China should and probably will allow its currency to readjust in the not-too-distant future, but heavy-handed threats from Congress and the White House are based on populist nonsense that, if enacted into law, would inflict real damage on American families," said Daniel Griswold, director of the Centre for Trade Policy Studies at the Cato Institute in Washington.

Griswold argues that China has a growing demand for imports that includes a broad range of U.S. products, from wheat, soybeans, and cotton to plastics, semiconductors, and industrial machinery. He notes that since 2000, U.S. exports of goods to China have more than doubled to 35 billion dollars, while U.S. exports to the rest of the world have grown only two percent.

"The dollars the Chinese earn from selling in the U.S. market are not stuffed in mattresses," Griswold said. "They come back to the United States, either to buy our exports, or to invest in U.S. Treasury bonds, which help to keep U.S. interest and mortgage rates lower than they would be without Chinese investment."

Slapping tariffs on Chinese goods, he argues, would disrupt "a mutually beneficial relationship" with the world’s most dynamic economy.