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Issue 20, 2006 (05 October)
 Schumer, Graham Withdraw China Tariff Bill as Bush Administration Pushes Long-Term Approach

Senators Charles Schumer (Democrat-New York) and Lindsey Graham (Republican-South Carolina) announced on 28 September that they have withdrawn legislation (S. 295) that would have imposed an additional 27.5% duty on all imports from China unless Beijing took steps to revalue its currency within a specific timeframe. Schumer and Graham had formally requested on 14 September that Senate leaders schedule floor time for a vote on the bill, which has been at the forefront of congressional efforts to deal with China trade issues since it garnered an unexpectedly high level of support in a procedural vote in April 2005. But the two lawmakers agreed to take the measure off the table after a personal appeal from President Bush and an agreement with Senate Finance Committee Chairman Charles Grassley (Republican-Iowa) and Ranking Member Max Baucus (Democrat-Montana) to collaborate on a new currency bill early next year.

The announcement was somewhat unexpected, as Schumer and Graham have been adamant in their insistence that Beijing address the currency issue. Just two weeks ago the senators had finally asked for a floor vote after 18 months of agreeing to delay it, noting that the White House's efforts during that time had done little to solve the problem. "We've been very patient, but have seen little progress," Schumer said, noting that the yuan has appreciated less than five percent since July 2005 compared to the 15-40 percent by which it is estimated to be undervalued. "The Senate will be voting on our bill if China doesn't make a significant move very soon." Added Graham, "We have been determined and we have been reasonable. Now, the date of our promised vote is approaching and we are sorely disappointed with China's pace of reform."

In addition, with elections right around the corner and rising congressional displeasure with Chinese trade policies, the Senate was thought likely to approve the Schumer-Graham bill once it was brought up for a vote. Some observers speculated that senators saw the bill as a free vote they could use to send a message to Beijing since it was generally expected that the House would not approve the bill and it would therefore die with the end of the current congressional session.

Last week, however, the two lawmakers withdrew the bill without any "significant move" or increase in the "pace of reform" by China. They asserted that the measure had served its purpose, citing as progress the same bi-lateral negotiations and incremental Chinese moves they had criticised for over a year. "The bottom line is that this bill was designed as a wake up call, and in that it has been a rousing success," Schumer said. "Before this bill, nobody cared about China currency. Now it is front and center. Before this bill, China's currency wasn't moving an inch. Now, it has already moved 4.6% and hopefully is on the path to more progress. Now it is time to craft a bill with a real chance of becoming law that will complete the job." Graham's remarks were nearly identical. "The tariff legislation, whose chance of becoming law was always close to zero, did serve a useful purpose. As a result of our efforts, the Chinese no longer peg their currency to the American dollar. They have also begun a process of small revaluations -- totaling about 4 percent," he said. Referring to the bill he plans to work out with Schumer, Grassley and Baucus, Graham added, "The legislation will be WTO compliant, have bite, and will become law if China continues down its current path."

But the about-face is perhaps not as surprising as it may seem. Despite their rhetoric, Schumer and Graham had repeatedly put off a vote on the bill in order to gauge the results of the periodic high-level discussions that took place between the two countries, implicitly going along with the White House's desire for a less confrontational approach to the issue. Asked by both the president (in an unusual personal appeal) and new Treasury Secretary Henry Paulson for some room to implement Paulson's "new ideas" on dealing with China, which would have been limited by the constant if uncertain threat posed by the Schumer-Graham bill, the senators agreed. Paulson was hired largely because of the prospects that his close ties to Chinese leaders through his private sector experience would facilitate progress on currency and other troublesome trade issues, and after meeting with him early last week Schumer and Graham proclaimed their faith in his ability to get results.

This was an interesting development considering that the primary outcome of Paulson's first major engagement with China during a trip there last month was the announcement of a new high-level Strategic Economic Dialogue that the Treasury Department specifically said is designed to "discuss long-term strategic challenges, rather than seeking immediate solutions to the issues of the day." This approach is consistent with the views of the many economists who say China should not significantly alter the value of its currency until its financial and banking systems have been reformed, which is generally recognised to be a long-term initiative. Beijing has made that same argument the cornerstone of its consistent (and successful) resistance to U.S. pressure to move quickly to revalue the yuan. A more long-term approach is therefore likely to be welcomed by China, which is no small consideration for a Bush administration that has actively courted Chinese co-operation on the national security issues that are its top priority.

Treasury did note that the discussion of long-term structural issues under the strategic dialogue, which is the first of its kind for the United States, is intended to provide a more solid foundation for pursuing concrete results through existing initiatives like the Joint Commission on Commerce and Trade. The JCCT meets annually and focuses on short-term and medium-term actions to address issues like industrial policy, intellectual property rights and the regulatory environment. "The new strategic dialogue will provide support and guidance for these existing bilateral economic forums, which will remain essential to managing specialized aspects of the interdependent U.S.-China economic relationship," a Treasury fact sheet said. "Bilateral issues will continue to receive full attention, including pressing China for floating exchange rates, greater intellectual property rights, and increasing market access."

While the withdrawal of the sanctions bill means that the administration now has a window of opportunity to demonstrate the ability of the strategic dialogue to yield results, it remains to be seen how long that window may be open. Schumer and Graham stated at a 28 September press conference that one of the main factors in their decision was their agreement with Grassley and Baucus to work together on a new currency bill that will address countries other than China and be consistent with WTO rules. While Schumer suggested that this bill may include a punitive component, it may end up more closely resembling legislation introduced earlier this year by Grassley and Baucus, which would have made it easier for Treasury to formally cite China on currency issues but included only limited penalties.

The prospects for any such legislation are unclear. By the time it begins working its way through the Senate, it will have been about two years since the procedural vote that initially propelled the Schumer-Graham legislation to notoriety. Congressional ire over Chinese trade policies certainly seems to have only increased during that time, what with the bi-lateral trade deficit soaring past US$200 billion in 2005, growing concerns about Beijing's implementation of its WTO accession commitments, China's general lack of interest in the Doha Round negotiations, and a sharp rise in textile transshipment. But lawmakers will also be aware that the threat of sanctions embodied in the Schumer-Graham bill has done little to prompt China to make any changes it was not already prepared to make for its own reasons. The yuan was de-pegged from the dollar in July 2005 and has been allowed to rise somewhat since then, but primarily as a way to cool an overheating economy. In September the export tax rebates provided to various industrial sectors were lowered slightly, but mostly to help Chinese companies move further up the value chain. China has repeatedly emphasised that it will act when doing so is in its own interests, not in response to U.S. pressure.

With little chance, then, that any legislation that comes down from Capitol Hill will be able to force China to make significant changes to its currency policy, it appears that there is only one other viable option the U.S. has to reach that objective - filing a WTO case. After holding off on the use of this weapon to allow China time to adjust to its WTO obligations, the U.S. has used it to great effect this year. Three times Washington filed or threatened to file a WTO complaint against Beijing, and three times the problem at hand was resolved before the dispute proceeded to litigation. A fourth case, against China's import tariff policy on auto parts, is the first to have not been resolved through bi-lateral consultations, and a dispute settlement panel is expected to be formed shortly.

It is extremely unlikely, however, that the Bush administration would escalate the currency issue to this level. Whether for economic, national security or other reasons, it clearly has no intention of abandoning its strategy of continuing to engage in co-operative discussions with China on this topic. It is difficult to foresee a situation that would prompt the White House to direct the U.S. Trade Representative to file a currency complaint and even more unclear whether such a case could be successful considering that no currency policy has yet been challenged under WTO rules.