The faces at the negotiating table may change over the years, but the dispute between the USA and China remains the same: how should America's policymakers respond to China's undervalued currency? As China suppresses the value of its currency, it creates an unlevel playing field for U.S. businesses, and this competitive disadvantage contributes to U.S. jobs losses.
Few dispute that China's currency is undervalued. The most important question is what response will put America in a more competitive position? This week the Committee on Ways and Means will hold an important hearing with testimony from Treasury Secretary Timothy Geithner to discuss a way forward.
The hearing will be a chance to discuss H.R. 2378, a Democratic bill that seeks to label China as a currency manipulator. The bill would impose penalties and completely redefine the international community's definition of government subsidies, thereby inviting trade retaliation and potentially violating our own World Trade Organization (WTO) obligations. With potentially historical losses looming for Democrats in November, in part due to the failure of Democratic policies to drive down unemployment rates, some will no doubt indulge the temptation to score cheap political points with this bill at the expense of rational policy.
Further illuminating the demagoguery behind this bill is the fact that the Treasury Department is required to report semi-annually on designating currency manipulators, yet has declined to name China as a manipulator this year. If Democrats believe labeling the Chinese as currency manipulators would level the playing field for U.S. businesses, why is it that Geithner has not officially done so?
Because currency manipulation is just the tip of the iceberg.
Besides currency manipulation, the Chinese government in recent years has enacted indigenous innovation requirements that hurt our ability to compete in China, failed to protect intellectual property rights for U.S. companies, created an unpredictable regulatory maze for foreign companies trying to invest and sell in China, and continued to subsidize Chinese industry at the expense of foreign competition. Slapping the Chinese with a label and penalties will absolutely lead to more protectionist practices.
The Democrats' hope that bumper-sticker policies can govern our complex trade relationship with China in this election year is ironic given the party's usual demands that American foreign policy be guided by multi-lateral organizations. What's happening here is Democrats don't want to admit that the elephant in the room is America's enormous debt obligation to China. We currently owe the Chinese almost nine hundred billion dollars which, quite simply, weakens our bargaining position when it comes to trade negotiations and issues of China's currency valuation. Therefore, one solution to this problem is to cut our federal spending and focus on debt reduction, thereby strengthening our hand in relations with China.
In suburban Chicago I have more than 1,200 small and medium-sized manufacturers working, importing, exporting, and creating jobs in my district. Over the past month I have had the opportunity to tour and visit with many of the companies in my district, and they expressed a consistent theme: they don't need extra help or penalties on the Chinese, but they do want China to put a fair value on their currency.
In a fair fight, two centuries of experience has shown us that American ingenuity will win. However, this plea from suburban Chicago manufacturers alludes to the delicate balance we face in trying to force China to revalue the Yuan without igniting a trade war that will only broaden the damage done to U.S. businesses, and deepen the impact on those suffering now.
Currency manipulation is only one facet of our relationship with China. Public policy, like physics, is governed by Newton's third law of motion: for every action, there is an equal and opposite reaction. A careless election-time whack at the very real problem of Chinese currency manipulation may result in a return salvo of Chinese sanctions not in any of our best interests.