The Fine Art of China-Bashing

WASHINGTON -- With the election season heating up, the debate here is no longer whether to bash China over its trade and currency policies. It's how hard to bash China.

Congress is threatening the trade equivalent of a nuclear first strike. The Bush administration, having lobbed a few shells of its own at China in recent weeks, is now wary of going too far.

Lost in the dustup is whether the rhetoric will really help U.S. manufacturers compete against Chinese companies – or just help U.S. politicians score points with anxious voters.

At a Senate Banking Committee hearing Thursday, lawmakers pressed Treasury Secretary John Snow to ratchet up anti-China measures. "The time for diplomatic niceties has passed," Sen. Charles Schumer (D., N.Y.) told Mr. Snow. "The administration needs to grow some backbone and take a firm line with the Chinese on the currency issue."

Senators from both sides of the aisle were angry that the Treasury Department Thursday passed up an opportunity to hit China harder when the agency issued a congressionally mandated report, in which it found China innocent of "manipulating" the yuan to gain an edge on U.S. companies.

Since 1994, China has kept the yuan, also known as the renminbi, fixed in a narrow range of around 8.28 to the U.S. dollar. American manufacturers complain that the Chinese currency is weaker than market conditions would justify, making U.S. products relatively more expensive than their Chinese competitors'.

Had the Treasury Department concluded otherwise – the law allows only two options, to find manipulation or no manipulation – the administration would have been forced to enter formal negotiations with China, raising the stakes, apparently higher than Mr. Bush wants to go.

"This report is a whitewash," Sen. Schumer fumed. Sen. Richard Shelby (R., Ala.) chimed in: "If they're not manipulating their currencies, what are they doing?"

All the rhetoric glosses over the question of whether the political flak will change China's behavior or, even if it does, whether such a change would boost America's beleaguered manufacturers. And if threats to retaliate in Congress pick up steam, the administration may soon regret having jumped into the fray as forcefully as it has in recent months.

Pressed by the manufacturing lobby, Congress is pondering several bills to warn or punish China for alleged unfair trade practices, including one that seeks to impose a 27.5% tariff on all Chinese imports unless China lets its currency float. In part to head off such threats, the Bush administration gave in to intense industry pressure in July and began its own China-bashing campaign, turning up the volume substantially in recent weeks.

Commerce Secretary Donald Evans said in Beijing Tuesday that U.S. patience is "running thin" with China's "unfair" trade practices and that Washington "will not tolerate a stacked deck." President Bush last week urged the Chinese to allow the yuan to move with the market, implying that China was keeping the currency artificially weak to gain a trade advantage. Both Mr. Snow and U.S. Trade Representative Robert Zoellick went to China recently to make the same case.

The U.S. aim, administration officials say, is to get China to budge at least a little on the currency – perhaps by revaluing the yuan if not letting it float – and to push ahead on reforms to which Beijing committed itself when it joined the World Trade Organization nearly two years ago. High on the list of irritants are discriminatory regulations, rampant piracy of American software and movies, and barriers that keep U.S. banks and other service companies out of China.

In private meetings in Beijing, Messrs. Evans and Zoellick warned that if the Chinese didn't move, Congress may – to worse effect. "We said that unless you guys make real progress, it's going to be hard to support an argument to keep a healthy trading relationship alive and to fight back in Congress," said Grant Aldonas, a Commerce Department undersecretary traveling with Mr. Evans.

But the administration's strategy carries plenty of risk.

If the Chinese don't take dramatic steps – and few expect they will – Congress may feel all the more compelled to push forward on legislation that would violate WTO rules and wreak havoc on U.S. companies that rely heavily on Chinese imports. Brink Lindsay, head of trade policy at the Cato Institute, is blunt: "The administration has decided to play politics with the China issue to create the appearance that it is doing something about the soft-job picture. And it will come back to haunt them."

America's historic trade deficit with China is seen by many as the chief cause of a steady loss of U.S. manufacturing jobs. China's exports to the U.S. increased by $16.5 billion this year through August, from the year-earlier period, putting the overall deficit with China on course to exceed $120 billion this year.

These figures, however, disguise other trends. Much of China's economic growth, for instance, comes at the expense of other major U.S. trading partners, such as Mexico and Japan. And while overall imports are up by $78 billion through August, goods and services from countries other than China account for more than 80% of that growth.

At the same time, a sizable share of China's shipments to the U.S. – some experts say a third or more – comes from American companies with factories in China. China is also the world's fastest-growing export market, and in an otherwise flat year for American exports, U.S. shipments to China are up more than 20%.

Besides China's role in the global economy, Mr. Bush has plenty of other reasons to try to strike a balance between criticism and flexibility, including China's usefulness as a bulwark against North Korea's nuclear ambitions and its attractiveness to U.S. investors.

The rewards of hawkishness are unclear. An Institute for International Economics report suggests that a 20% rise in the yuan's value probably would take only $10 billion off 2003's projected $570 billion deficit in the U.S. current account, the broadest measure of the U.S. trade balance. Should other East Asian countries, such as South Korea and Japan, let their own, floating currencies float upward, the balance might shift by $50 billion.

For a time, Bush aides had resisted picking up the China cudgel, despite an intensifying furor among smaller U.S. manufacturers. That changed suddenly at the end of July, when Mr. Evans got an earful on competition from China during a two-day bus trip through the Midwest. Just days before, the main U.S. textile lobby had filed petitions to limit some Chinese imports. Adding to the pressure on the White House, some Democratic presidential hopefuls have embraced the manufacturers' cause.

U.S. pressure isn't likely to yield major concessions. Beijing fears that tinkering with its currency could disrupt two pillars of its economy: banking and exports. Mr. Snow shares some of those concerns and is careful not to recommend an immediate move to float the yuan. Though China now has around $380 billion in foreign-exchange reserves, few believe its banks are ready to deal with the possibility that dollars could flow out of the country as quickly as they are now coming in.

"Not handling these problems correctly could bring economic chaos," warns Chen Baosen, a scholar of U.S.-China ties for the Chinese Academy of Social Sciences in Beijing.

Chinese State Administration of Foreign Exchange Director Guo Shuqing says flatly: "Unemployment in the U.S. has nothing to do with the renminbi."