China's undervalued currency gets scrutiny from U.S. Senate

WASHINGTON -- The Senate on Monday weighed whether to punish China for undervaluing its currency and taking away American jobs. At issue is whether legislation would boost the American economy, as its supporters argue, or initiate a damaging trade war with a major partner.

The bill has bipartisan backing and on a 79-19 vote easily achieved the 60 votes needed to move it to the Senate floor. But the legislation faces considerable hurdles before it becomes law.

The Obama White House, while agreeing that China's yuan is undervalued, has been wary of unilateral sanctions against the Beijing government. Major U.S. business groups share that concern and House GOP leaders have shown no interest in bringing it to a vote.

The currency bill does give congressional Democrats an opportunity to show they remain tough on unfair trade practices. The Senate took up the bill on the same day the White House sent to Congress free trade agreements with South Korea, Colombia and Panama that some Democrats see as threats to U.S. jobs.

The Senate bill, which does not specifically mention China, sets in motion a process for imposing punitive tariffs on a country with misaligned currencies.

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Supporters of the bill say that, despite some incremental adjustments by Beijing over the past year, the value of the yuan is still as much as 40 percent below what it should be, keeping the prices of Chinese goods artificially low and U.S. products excessively high. They say that's a major factor in a trade deficit with China that hit $273 billion last year.

Sen. Chuck Schumer, D-N.Y., who has been sponsoring currency legislation for the past six years, said China's "predatory currency practices" were "undermining the economic health of American manufacturers and their ability to compete at home and around the globe."

It's time, said Sen. Bob Casey, D-Pa., to "let the officials in China know that there are consequences to cheating."

Said Senate Majority Leader Harry Reid, D-Nev.: "This legislation will even the playing field and help American goods compete in a global market -- and keep American jobs here at home."

Chinese Foreign Ministry spokesman Ma Zhaoxu said in a statement Tuesday in Beijing that the Senate move "seriously violated WTO (World Trade Organization) rules and seriously disturbed China-U.S. trade and economic relations."

Ma said bilateral trade was mutually beneficial, and that China was the fastest growing export market for the United States. He added that the exchange rate was not the cause of the trade imbalance between China and United States.

"The Chinese side appeals to the U.S. side to abandon protectionism and not to politicize trade and economic issues, so as to create a favorable environment for the development of China-U.S. economic and trade ties," Ma said.

The Fair Currency Coalition, a group that supports the bill, gives the example of how a Chinese customer wanting to buy a $20,000 U.S. car would have to pay almost 140,000 yuan at the current exchange rate. But if the rate reflected market values, that car would cost only about 80,000 yuan, making it much more affordable.

Robert Scott of the left-leaning Economic Policy Institute said that with a 28.5 percent revaluation the price of a Boeing 737, about $57 million in dollars, would fall from the current 363.7 million yuan to 259.3 million yuan. "This would greatly increase the competitiveness of U.S. aircraft both in China and in world export markets."

But the consequences of imposing higher tariffs on Chinese goods are hard to predict. Bill supporters say it would make American goods more competitive and point to a study by Scott that appreciating the yuan by 28.5 percent would create up to 2.25 million jobs and cut the U.S. annual trade deficit by $190.5 billion.

But Doug Guthrie, dean of the George Washington University School of Business, argues that the legislation would do little to put Americans back to work and could saddle consumers with higher-priced Chinese goods.

He said it was difficult to see how any currency adjustment would close the wage gap between Chinese and American workers and that most economists predict that American importers would simply switch from China to other low-wage countries such as Vietnam or Indonesia. Moreover, big sellers of Chinese goods such as Wal-Mart are heavily investing in the Chinese market, and are not likely to stop buying from Chinese factories.

"Wal-Mart is so deeply embedded in China that there is no way" they will leave, and the end result will be higher prices for American consumers, he said.

Another concern is that China would retaliate by boosting tariffs on U.S. products. A statement by the Chinese central bank, the People's Bank of China, on Tuesday urged Congress to "avoid further escalating the exchange rate issue and spreading trade protectionism."

The statement warned that the proposed legislation "may seriously affect the process of China's exchange rate reform and may lead to trade war, which we do not want to see."

The Obama administration, like the Bush administration before it, agrees that China needs to appreciate its currency, but has cautioned against unilateral action that could generate a trade war.

The Senate vote coincides with a trip to Beijing by Treasury Undersecretary Lael Brainard. Treasury said in a statement that Brainard would tell the Chinese that while the yuan "has appreciated 10 percent adjusted for inflation since June 2010, the currency remains substantially undervalued, and more progress is needed."

The House in September 2010, voted 348-79 for a more narrow China currency bill, but the top two Republicans, current Speaker John Boehner, R-Ohio, and Majority Leader Eric Cantor, R-Va., were against it and don't appear inclined to bring up the issue if it passes the Senate.

Asked about it at a news conference Monday, Cantor replied only that he was "curious, really, as to where the White House is on that." He said he wanted to find out if there were any "unintended consequences" from the measure.