Currency bill reveals U.S. protectionism, risking Sino-U.S. ties

As U.S. Treasury Secretary Henry Paulson kicked off his Beijing visit on Monday, observers warned that trade protectionism in Washington posed a threat to China-U.S. trade relations.

Three days before Paulson's China trip, the Senate Financial Committee overwhelmingly passed a bill that allowed the U.S. government to use a wide array of measures to force other countries to adopt more market-oriented currency policies.

"This bill has ominous implications for U.S.-China trade and stands a very good chance of becoming law," said Stephen S. Roach, chairman of the Morgan Stanley Asia Limited, in an interview with Xinhua.

He said Paulson had an important job ahead in impressing on the Chinese leadership the gravity of the political situation in Washington. "Nothing happens by coincidence in the political realm. Washington's protectionist tilt is unmistakable," he said.

The economist who has spoken three times this year in the U.S. Congress on U.S.-China trade relations predicted that the final legislation would be passed at the end of the year with the bi-partisan support of at least two-thirds of the members in both the House and the Senate, ruling out the possibility of a veto by President George W. Bush.

As the U.S. trade deficit with China shows little sign of declining, U.S. politicians increasingly claimed the yuan was undervalued.

"I am not a believer in the currency elasticity theory of the bilateral trade fix. Without an improvement in U.S. saving, any such efforts on the currency front are doomed to failure," he said.

The net national saving rate of the United States averaged a record low of one percent over the past three years.

With little saving, U.S. economic growth had to rely on massive capital inflow. Unfortunately, U.S. dollar's position was being undermined by the strengthening euro and RMB yuan, said Tan Yaling, a research analyst with the Bank of China.

"Although the dominant position of the U.S. dollar will not weaken easily, the currency bill has unveiled a strong political hint that the American politicians want other countries to dance to their tune," she said.

The legislation allows U.S. companies to seek anti-dumping duties on goods from any country that maintains what the U.S. government calls a "fundamentally misaligned" exchange rate.

U.S. consumers and multinationals would stand to lose rather than benefit, because more than 60 percent of the total growth in Chinese exports originated from "foreign-invested enterprises", both Roach and Tan warned.

"By putting pressure on the RMB-dollar cross rate," Roach said," Washington is unwittingly squeezing the efficiency solution of U.S. multinationals and imposing the functional equivalent of a tax hike on American consumers."

The central parity rate of yuan against U.S. dollar has grown by more than eight percent accumulatively from 8.28 yuan in July 2005 to the latest high of 7.5725 yuan. The country's trade surplus, however, snowballed to 112.5 billion U.S. dollars in the first half of the year, up 83 percent from the same period last year.

The comparative advantages of China in production costs and productivity remained strong and punitive duties would only encourage China to expand its export market elsewhere, Tan said.

"The bill has predicated a hazardous tendency for the U.S. government to attempt to manipulate international organizations for its own good. This is unprecedented behavior and unacceptable," she said.

The legislation urges the Bush administration to take action through the International Monetary Fund and the World Trade Organization against targeted countries that declined to reform their currency policies while allowing the Federal Reserve to intervene in global markets against the misaligned currency if the country fails to make appropriate reforms one year after being cited by the United States.

Roach said the worst-case scenario would be an escalation of retaliatory trade actions between the U.S. and China, which would have devastating implications for U.S. consumers and Chinese producers alike.

"I am hopeful that the political leadership in both the U.S. and China might come to their senses before sliding down what could be a very slippery slope," he said.