Friday, April 22, 2005

Congress Restless Over Chinese Trade

After more than a decade of one-sided trade policies, which have permitted the wholesale export of the US manufacturing sector to mainland China and other parts of Asia, Congress is finally beginning to worry. In confirmation hearings, the Bush administration's nominee for US Trade Representative voiced the growing concern about the trade policies that have fueled rapid Chinese economic growth and increasing militarism.

Rob Portman, a Republican member of the House of Representatives, responded to mounting anger in Congress over Chinese trade practices by saying he would go there soon to “deliver a strong message in person to Chinese officials.”

“China does not always play by the rules,” he said in testimony that criticised China for intellectual property piracy and industrial policies that exclude US goods. “We need a tougher approach.”

While China offered huge opportunities for US exporters, he said “unless we can solve those problems the [US] consensus on trade is endangered.”

His comments are a further sign that pressure is mounting for the administration to adopt a harder line on trade with China. Congress has been considering various proposals that would allow the US to impose additional duties on Chinese goods to offset the benefits from what critics say is an undervalued currency. The US Treasury, which has long been seeking to coax China adopt a more flexible currency, said last week that China needs to move immediately.

Mr Portman took the rare step for a USTR nominee on Thursday by commenting directly on currency valuations, saying he agreed with Democratic senator Charles Schumer that China should “revalue” its currency.

Mr. Portman's tough rhetoric was enthusiastically received by congressional leaders, who reminded him that the administration has previously resisted confronting the Chinese on trade matter.

Overall the Senate Finance committee gave an enthusiastic reception to Mr Portman, with senior Republicans and Democrats on the committee saying they hoped to rush through his confirmation early next week.

In what one Democrat senator called a “bouquet tossing contest,” committee members lavished praise on the Ohio congressman. “Your problem is not with Congress,” said Max Baucus, the senior Democrat on the committee. “It's with the administration. The administration needs to get tougher.”

Mr. Portman's comments come amid increasing claims by American and European corporations that Chinese companies with which they do business are deliberately lying about their work practices so as to avoid scrutiny on human rights and labor standards.

[Chinese] Factory managers' forgery of payroll documents and time cards is increasingly sophisticated, according to auditors and western buyers who work with Chinese factories. Some estimate that more than half of the factories surveyed in social compliance audits have falsified at least some of their records.

“A few years ago, we were able to detect when records were altered by simply interviewing workers. Now workers are coached,” said Daryl Brown, vice-president for global ethics and business practices at Liz Claiborne.

Of course, the US has allowed the trade situation to deteriorate to such a point that any trade action against China by the US could profoundly - if temporarily - hurt the US economy. The Economist, ever the cheerleader for free trade with even despotic regimes like China, views congressional concern over China's trade-fueled economic and military buildup as "China bashing" and looks askance at efforts to reign in the export of American industry to China. Nevertheless, the Economist rightly points out that massive deficit spending by the Congress and Bush administration has put America in quite a pickle when it comes to taking action with China.

Less encouragingly, the political and economic risks are bigger this time round. In the 1980s Japan, for all its faults, was always viewed as a democratic ally in Asia. By contrast, China is now seen as a nasty communist regime and a dangerous rival. In the mid-1980s, America's current-account deficit was smaller, 3.5% of GDP in 1985 compared with 6.3% today, and its debt stock lower. Today, America is the world's biggest debtor, with China as an important creditor. A sharp reversal in China's appetite for American Treasury bonds could send interest rates soaring.

This might come sooner rather than later, according to Alan Greenspan, the chairman of the Federal Reserve. In testimony before the Senate budget committee this week, he stated that the Chinese government’s massive exchange-rate interventions were causing growing imbalances in the domestic economy that will force China to abandon its currency peg. Once this happens, the central bank can stop stockpiling dollar reserves—meaning its demand for American government securities will also dry up. Critics wonder if Congress, which has made little effort to curb America’s soaring budget deficits, has quite thought things through.

Chinese financing of America's monolithic national debt has left the US vulnerable to Chinese financial pressure, which may curtail the US's ability to deal resolutely with China in both trade and foreign affairs. The US needs to radically cut its public spending and reduce its deficits; it also needs to put the brakes on its out-of-control trade with China. Unfortunately, thanks to Washington's shortsightedness, it may not be able to do both at the same time.


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