A Trade War Right At Home

A deepening rift over China pits big U.S. companies against small ones

For decades, Washington's business lobby has led the charge for trade liberalization, with companies standing shoulder to shoulder in support of tariff-busting and free-market pacts.

Now that united front could be crumbling. A rift at the National Association of Manufacturers over trade with China points to a deepening division within the business community that reaches far beyond the Beltway. The split pits smaller U.S. manufacturers, who want the U.S. to combat the trade imbalance caused by China's currency manipulation, against their larger and more global peers, some of which are benefiting from the undervalued Chinese yuan. If the little guys prevail -- as they did in an early skirmish -- NAM, with 12,000 members, could become the first major group to endorse broad trade sanctions against a major trading partner.

"It is an extremely troubling sign," says Stuart E. Eizenstat, an adviser to President Clinton and now a law partner at Washington's Covington & Burling. "The universally accepted notion that the business community would always be there for free trade initiatives is beginning to splinter."

On Sept. 27, NAM's 250-member board of directors will consider endorsing legislation that would allow the U.S. to retaliate against China and other countries that manipulate their currency to gain an export edge. Caterpillar (CAT ), General Electric (GE ), Cargill, and others that benefit from cheap Chinese labor and exports, oppose the bill.

Normally, this would have been enough for NAM. But all that changed on June 29. In a surprise revolt, smaller NAM members showed up in droves at a meeting of the group's trade-policy committee to out-vote larger members. By a 75-46 margin, the panel endorsed the Chinese Currency Act of 2005, a bill from Representative Tim Ryan (D-Ohio) and House Armed Services Committee Chairman Duncan Hunter (R-Calif.).


The move capped two years of planning by small manufacturers, which are suffering revenue and job losses as customers -- often big manufacturers -- move operations offshore. "These mostly small companies assumed our trade associations were doing a great job representing us," says David W. Frengel, director of government affairs for Penn United Technology Inc., a precision tooler just north of Pittsburgh. "We found out that our trade association policies were being dictated by the folks who show up at the meetings, mainly big multinationals who had full-time government affairs staff in Washington." So Frengel organized smaller companies to push their own agenda. They took their fight to NAM because its bylaws gave them a significant voice on policymaking decisions.

It's not unusual for a particular industry to take a hard line on a particular trade pact; U.S. textile makers balked at liberalization deals with Africa in the 1990s, for example. And internal discord isn't new to business groups. But it's exceptional for such a broad-based and influential lobby to be torn over free trade. The globalization pushback is being fed by a confluence of events, including job losses and the increasing economic clout of China. "China is waging a mercantile war, and we're being pacifists," says M. Brian O'Shaughnessy, president of Revere Copper Products Inc. in Rome, N.Y.

Large NAM members declined to comment on the record or didn't return phone calls. But some agreed privately that NAM's thousands of small members could be the most important voice to join the growing fair-trade cacophony.

Regardless of how the board votes, NAM President and CEO John Engler will find himself in a tough spot. Small companies are threatening to quit if the trade group refuses to take a tougher stand on China. But the multinationals, which provide the bulk of NAM's $23 million annual revenue, fear that a hard line could lead to retaliation against their operations there, or worse, erupt into a full-blown trade war. "There's no law we can pass here that can fix China's currency if the Chinese government doesn't want to fix it," Engler says.

By Lorraine Woellert

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