Wednesday, June 13, 2007

Senators Seek to Penalize China for Trade Policy

By STEVEN R. WEISMAN (New York Times)

WASHINGTON, June 13 — A group of leading Republican and Democratic senators, signaling growing Congressional impatience with Chinese trade practices, proposed legislation today aimed at forcing penalties on China over its policy of suppressing the value of its currency to promote exports.

The legislation, which appeared likely to be opposed by the Bush administration, was offered by Senators Max Baucus, a Montana Democrat, and Charles Grassley, an Iowa Republican. They are. respectively, the chairman and the ranking Republican on the Senate Finance Committee, which oversees trade measures.

Joining them are Senators Charles E. Schumer, the New York Democrat, and Lindsey Graham, the South Carolina Republican, both of whom had sponsored a tougher version of the bill last year calling for tariff increases of 27 percent on Chinese goods. But that bill was withdrawn under administration pressure.

The new legislation is one of several bills that have been introduced in the House and Senate aimed at China, and many lawmakers and experts are predicting that some sort of anti-China legislation could pass this year, possibly even over a presidential veto.

The Chinese-American trade deficit last year was $232 billion, about a third of the total American trade deficit with its trading partners. After years of racking up trade surpluses, China is sitting on an estimated $1.4 trillion in foreign exchange reserves, and it has started to convert some of those reserves into purchases of American companies.

Only last month, the Chinese bought a $3 billion stake in the Blackstone Group and administration officials say they expect China to go on a shopping spree soon, much as Japan did in the 1980s. Administration officials say they are encouraging foreign investment in the United States but worried about Congressional opposition.

White House officials say Treasury Secretary Henry M. Paulson Jr. has warned China repeatedly that if it does not open its economy more to outside investments and exports, and make more progress in letting its currency float more freely, the administration may not be able to stop trade legislation against it.

“We have told the Chinese that there will be legislation on China,” said an administration official, speaking anonymously to be more candid. “What we don’t know is what form it will take.”

Mr. Paulson helped persuade Mr. Schumer and Mr. Grassley last year that their original bill would violate international trade rules. But he also asked for time to begin what he has called a cabinet-level “strategic economic dialogue” with China to get the Chinese leadership to change several economic practices.

The decision to reintroduce the bill now reflects a widespread feeling in Congress that Mr. Paulson’s approach has failed to achieve results, especially on the currency issue.

In a separate development today, the Treasury Department issued its semi-annual report to Congress on the exchange-rate policies of American trading partners. As before, the Bush administration took the position that China did not meet the “technical requirements” of being labeled a currency manipulator, a designation that might result in American sanctions against Beijing.

Despite refusing to designate China in that fashion, the Treasury Department said it had “forcefully” raised the issue of currency “at every available opportunity and will continue to do so.”

The report also repeated assertions by Mr. Paulson and others that China has experienced its rapid economic growth by maintaining a “severely unbalanced” economy that is driven by exports and policies that discourage domestic consumption by the Chinese themselves.

The consensus of Western economists is that China has acted to keep the value of its currency, known as the yuan, low by purchasing dollars on a vast scale and compiling historically high reserves of dollars and other foreign currencies. A higher value of the yuan relative to the dollar would make Chinese exports more expensive and imports less so.

China has acknowledged that it must change its currency practices but appealed for patience. The yuan has appreciated about 8 percent in relation to the dollar since July 2005. But economists say that the yuan has stayed at about the same value in relation to an aggregation of the dollar and all other currencies.

With China’s currency levels artificially low, especially against European currencies, European leaders have also begun warning China over its trade practices. Peter Mandelson, the European Union’s trade commissioner, warned last week that China was “at a crossroads” in its trade relations with the West.

The Bush administration has tried to persuade China to change its economic practices, but with limited success, and has taken more confrontational actions of its own in the last several months.

Among these actions have been a new policy of calculating what are subsidies to Chinese goods that could lead to increased tariffs on exports. In addition, the United States has taken China to court at the World Trade Organization, charging that its policies on subsidies and protection of copyrights and trademarks are illegal.

The new legislation proposed by Senators Baucus, Grassley, Schumer and Graham was drafted in order to force the administration to impose penalties on China in a way that would be compliant with World Trade Organization rules, which bar protectionist measures except under some circumstances.

The legislation would require the Treasury Department to report on “fundamentally misaligned currencies” that would require “priority action” leading to consultations with the International Monetary Fund and the World Trade Organization. If these talks failed, certain penalties would then kick in.

Among these would be, in the case of China, a shift in American policies opposing China’s bid for more voting share at the I.M.F. In addition, the United States would more be required to more readily accuse China of “dumping” exports at below cost, leading to possible tariffs on Chinese goods.

The legislation would allow the American president to waive these and other punitive actions for a time, invoking national security concerns, but also allow Congress to register its disapproval of any such waivers.

President Bush and Treasury Secretary Paulson have argued that any such punitive measures only make it harder to persuade the Chinese to change their economic practices. When the administration imposed penalties earlier this year, for example, the Chinese accused the United States of fomenting a crisis atmosphere, making cooperation more difficult.

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