China Currency Message May be Stronger Than Likelihood of U.S. Sanctions

The U.S. Senate’s vote to punish China for depressing its currency to promote cheap exports is the latest legislative ritual in which the message may be as important as the proposed sanction.

U.S. House Speaker John Boehner practically declared the measure dead on arrival in the Republican-run chamber after the Senate’s 63-35 vote last week to let U.S. manufacturers seek duties on Chinese imports if they prove they were harmed by manipulation of the renminbi. Boehner, of Ohio, voiced “grave concerns” the measure may trigger a trade war.

Supporters of the sanctions say they are sending China a message, whether the legislation becomes law or not. Their votes also might pay domestic political dividends.

“A number of members” have said “it’s good politics, but we don’t think it’s good policy” to punish China over the value of its currency, said Republican Senator Jeff Sessions of Alabama, who said he co-sponsored the measure because it “protects fair trade.”

Proponents say China subsidizes its exports, and therefore undermines U.S. industries, by undervaluing its currency by at least 20 percent.

Michigan Senator Debbie Stabenow, a Democrat, said manufacturers of steel tube in her state have “been undercut for years by China” because of currency manipulation. “They’ve been laying off people for a long time,” she told reporters a day after the Oct. 11 Senate vote.

Tool & Die Company

Automation Tool & Die Inc. in the Cleveland suburb of Brunswick, Ohio, lost a $1 million contract in 2009 to provide the seat base for long-haul trucks because the yuan’s depressed value helped a Chinese competitor underbid by 20 percent, according to co-owner Bill Bennett.

“We lost the bid due to price,” Bennett, who owns the company with his brother, Randy, said in a telephone interview. “We were told we were 20 percent higher than the next bid and we were told that bid came from China.”

The price differential can only be explained by currency manipulation because “there is no way on a metal part that anybody ought to beat somebody else’s price by 20 percent,” said Bill Gaskin, president of the Precision Metalforming Association. The trade group in Independence, Ohio, represents 850 metal fabricating and stamping companies as well as tool and die makers.

In the past, China has responded to pressure by allowing the renminbi, or yuan, to appreciate in value. Before a G-20 economic summit last year in Toronto, China’s Central Bank announced changes in the valuation of the yuan, and the currency appreciated 0.43 percent.

‘Example of Frustrations’

Lawmakers and analysts say Chinese authorities allowed the yuan to appreciate 2.9 percent over the last half of 2010 when the House, under Democratic control, passed similar legislation 348-79.

“The action you saw in the Senate, the currency bill, is an example of frustrations,” Francisco Sanchez, undersecretary for international trade at the Commerce Department, told reporters in Hong Kong today. “There’s a perception that China doesn’t always promote policies that create a level-playing field.”

If the Senate measure became law, China would most likely retaliate by making large purchases from European companies instead of U.S. manufacturers, said Nicholas Lardy, an economist at the Peterson Institute for International Economics in Washington. Such retaliation need not be overt, he said.

Under this scenario Chicago-based Boeing Co. (BA), one of the world’s largest airplane makers, “won’t get a contract for years” to build Chinese airliners, Lardy said. “That’s why the biggest businesses in the U.S.” with substantial investments in China “are so dead set against this legislation,” he said.

Record Trade Deficit

The China currency issue also has resonance in the 2012 presidential campaign. Like Barack Obama and George W. Bush when they were running for president, Republican candidate Mitt Romney has chided the White House incumbent for not being tough on China’s currency policy. Obama, as president, hasn’t stated an official position on the Senate measure.

The record $29 billion trade deficit with China in August is reason enough to allow a floor vote on the measure, the lead House sponsor, Michigan Democrat Sander Levin, said at an Oct. 14 news conference. “The history of this is that when there has been pressure, China has acted,” he said.

Boehner and other House Republican leaders “don’t want this bill on the floor for one reason; it would pass,” Levin said. Sixty-two Republicans are among the measure’s 225 sponsors, a majority of the 435-member House.

Democratic Opposition

Boehner said Oct. 6 “the president agrees with me,” and suggested that Obama’s silence on the issue was intended to avoid offending fellow Democrats who back the bill.

“Has Representative Levin discussed this issue with President Obama, who also opposes this bill?” Boehner spokesman Michael Steel said in an e-mail.

Some Democrats oppose the sanctions. Democratic Senator Claire McCaskill of Missouri said she voted against the measure in part because she didn’t want to undercut her state’s attempt to attract more Chinese cargo planes to use the St. Louis airport as a hub for delivering goods to the U.S.

The Chinese “just landed their first plane two weeks prior,” and “we are in competition with other states,” said McCaskill, who faces re-election next year. If she had voted for the measure, “I could see the whole thing tumbling down at my feet.”

Washington state’s two Democratic senators, Maria Cantwell and Patty Murray, a member of Senate leadership, voted no.

“One out of five jobs depends on trade from my state so we are very conscious of the impact,” Murray said.

‘Send a Message’

The Chinese government “plays the fear card” with U.S. companies that do business in that country, telling them “you better call a congressman” to lobby against any sanctions, said South Carolina Senator Lindsey Graham, a Republican who voted for the bill.

Last week’s vote marked the first time the Senate passed a measure allowing sanctions against China. Fewer senators would have backed it “if there was a realistic chance it would become law,” said Douglas Irwin, a Dartmouth College economist in Hanover, New Hampshire. “The vote was to send a message,” he said.

Economists disagree about the effect of the currency disparity on U.S. jobs and how many would be created if sanctions forced China to let the value of the yuan rise.

Create Jobs

Ending the currency misalignment would create 500,000 new U.S. jobs, C. Fred Bergsten, director of the Peterson Institute, told Congress last year.

“You’re not talking about an immediate benefit to companies,” countered Michael Moore, a George Washington University trade economist and former member of Bush’s Council of Economic Advisers.

It would take as much as a year to investigate U.S. companies’ claims they were harmed by Chinese manipulation, and companies would have to get support from half of their U.S. competitors to show harm to the industry, Moore said.

There wouldn’t be an “immediate flood of cases,” Moore said. It would more likely produce “trade friction,” he said.

To contact the reporter on this story: James Rowley in Washington at jarowley@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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