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US-CHINA: Trade War Heats Up

Eli Clifton

WASHINGTON, Mar 17 2010 (IPS) - Relations between Beijing and Washington have been far from smooth since the beginning of the year.

But a new bill introduced in the U.S. Senate is adding to existing tensions by attacking China’s trade practices and proposing legislation which would push the Barack Obama administration to charge China with currency manipulation and could lead to unilateral retaliatory action against Chinese imports.

The bipartisan group of senators emphasised what they consider to be unfair trade practices by China, but also the domestic economic conditions which create incentives for protectionist trade policies by the U.S.

“We are sending a message to the Chinese government: if you refuse to play by the same rules as everyone else, we will force you to. China’s currency manipulation would be unacceptable even in good economic times,” said Sen. Charles E. Schumer, when announcing the legislation on Tuesday.

“At a time of 10 percent unemployment, we simply will not stand for it. There is no bigger step we can take to promote U.S. job creation, particularly in the manufacturing sector, than to confront China’s currency manipulation,” Schumer continued.

On Monday, over 100 members of congress signed a letter calling on the Obama administration to label China a currency manipulator.

Twice a year the Treasury Department issues a report listing countries which “manipulate the rate of exchange between their currency and the United States dollar (USD) for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade,” but China has historically been left off the list of countries highlighted in the report.

Nobel Prize-winning economist Paul Krugman argued in an op-ed in the New York Times on Sunday that now is the time for the U.S. to deal with China’s undervalued currency -reports place it as undervalued by 20 to 40 percent – by imposing a 25-percent tariff on Chinese imports.

The calls for action against China’s currency peg have not gone unnoticed by Beijing but the increasing urgency and volume of the demands from Washington appear to be prompting equally belligerent responses from Beijing.

Chinese Premier Wen Jiabao had sharp words for Washington on Sunday during his once yearly news conference, in which he blamed the downturn on Sino-U.S. relations on the fact that the Obama administration had “violated Chinese territorial sovereignty” by moving forward with arms sales to Taiwan and Obama’s meeting with the Dalai Lama.

“First of all, I do not think the renminbi is undervalued,” Mr. Wen said, according to the Wall Street Journal. “We are opposed to countries pointing fingers at each other or taking strong measures to force other countries to appreciate their currencies. To do this is not beneficial to reform of the renminbi exchange-rate regime.”

Many in Washington took issue with Wen’s assertion that the remninbi (RMB) wasn’t undervalued but the rest of his answer did not preclude the possibility of an adjustment.

Earlier this month, China’s central bank governor Zhou Xiaochuan stated that the RMB’s unofficial peg to the U.S. dollar is a “special” measure that will eventually end.

The problem, unfortunately, is that as [U.S.] senior officials speak out on this issue and demand that China appreciate their currency, the less likely it makes it that an adjustment will take place in the near term,” Bonnie Glaser, senior fellow in China studies at the Center for Strategic and International Studies in Washington, told IPS.

The Chinese leadership is very leery of doing anything under pressure from abroad and doesn’t want to be seen in the face of its public as weak or succumbing to outside pressure. “Even if there is recognition that they should adjust their currency, timing is in part going to be determined by what serves their interests. They will factor in the rhetoric from abroad,” Glaser continued.

China ramped up a full-court-press this week, enlisting U.S. multinational to help battle the rising calls of, what Beijing terms, “protectionism” emerging from Washington.

On Mar. 16, a spokesman at the Chinese commerce ministry told reporters, “We hope that U.S. companies in China will express their demands and points of view in the U.S., in order to promote the development of global trade and jointly oppose trade protectionism.”

In 2005, the RMB was adjusted from 8.27 to 8.11 RMB per USD and the USD peg was lifted. The RMB now moves in relation to a basked of currencies which is dominated by the USD, euro, the Japanese yen, and the South Korean won.

The RMB has appreciated by 20-percent from 2005 to 2008 but critics of China’s currency policy, such as Schumer and Sen. Lindsey Graham, who led the legislation announced on Tuesday, are increasingly frustrated with the lack of another major adjustment.

“I think that when we look at what Wen Jiabao said at press conference, and read between the lines, then nothing is ruled out but at the same time the heightened rhetoric here and the letter from congress makes it exceedingly difficult for the Chinese to say, okay in the face of pressure from the U.S. we’ll do [an adjustment] now,'” said Glaser.

Tensions over the RMB’s valuation are only the most recent of a long list of disagreements to have shaken Washington’s relationship with Beijing in recent months.

In September, Obama authorised a 35-percent emergency tariff on Chinese tyre imports in order to curb a “surge” of Chinese tyres which, according to U.S. trade unions, have cost 7,000 U.S. factory workers their jobs.

Beijing responded quickly to condemn the U.S. tariffs and threatened to levy its own tariffs against U.S. products.

In January, Google announced that email accounts owned by diplomats, human rights activists and journalists had been infiltrated by Chinese hackers, leading Secretary of State Hillary Clinton to deliver a speech outlining the administration’s position on intellectual property theft, cyber security and Chinese internet censorship.

China responded by accusing the U.S. of “information imperialism” and denied charges that the government participated in cyber attacks.

In February, the Beijing-Washington relationship hit another rough patch when China threatened to impose sanctions on U.S. companies participating in an upcoming 6.4-billion-dollar arms deal with Taiwan.

As the global economic crisis stressed both China and the U.S. economies, China has sought to shift the investments from its balance of payments surplus away from U.S. dollars and into equities and commodities while Obama has been under pressure to address the growing trade deficit with China and apply more pressure to China to revalue the RMB.