A columnist at the Washington Post in late September called the US-China Business Council (USCBC), an organization of roughly 220 US companies that employ more than 7 million Americans, “un-American” for opposing, in USCBC’s opinion, counterproductive tariff legislation aimed at addressing China’s undervalued currency. During a September 29 House of Representatives debate, several members of Congress characterized the bill as being one that supported “real” Americans.

Frustrations are high on Capitol Hill and Election Day is close at hand, but that’s pretty strong rhetoric, even for Washington. There isn’t much disagreement about the desired result; it’s all about how we get there.

The House of Representatives passed the currency legislation in late September by a wide margin. The Senate did not act before it left for recess in October, but it could take up the issue during a “lame duck” session following the elections.

Like others, USCBC believes that China’s exchange rate should better reflect market influences from trade flows. But USCBC also believes that tariff legislation will be counterproductive to reaching that goal and will harm American manufacturers and farmers.

Why? Proposed legislative solutions require an estimate of the “true” value of the renminbi (RMB) and then assess tariff penalties to offset the undervaluation. The problem is that 10 different economists will give you 10 different exchange rate estimates; at best, only nine of them will be wrong. The approach is not only highly subjective, but also impractical. Exchange rates change daily; inflation rates, interest rates, and all the other factors that affect an exchange rate estimate also change frequently. How can a fixed-tariff penalty accommodate this fluctuating reality?

In addition, despite changes made to the bill in the House Ways and Means Committee, significant questions remain about whether addressing the exchange rate with countervailing duties would violate World Trade Organization (WTO) rules. Losing a WTO case would not strengthen our ability to sway China to make changes to its exchange rate policy.

USCBC further opposes the legislation because it will not achieve the purported goals of significantly reducing the trade deficit and creating jobs here at home. Much of the products we import from China are items that we imported from Japan, South Korea, Taiwan, Hong Kong, and Malaysia before. If the RMB exchange rate appreciates to the point that we no longer import something from China, in many—if not most—cases we will import it from somewhere else, not make it in the United States. The big winners from this legislation may turn out to be countries such as Thailand and Mexico.

The Congressional Budget Office (CBO) backs up this point in its assessment of the bill: “CBO estimates that a small share of imports from [China] would be found to cause injury to domestic [US] firms,” because of limited overlap with US production.

US companies large and small have a host of other critical trade issues with China, such as intellectual property rights piracy, Buy China policies, and other market access barriers, that would likely get sidelined in a currency fight. The annual US-China Joint Commission on Commerce and Trade bilateral trade talks, an important channel to address these issues, are tentatively scheduled for mid-December. This tariff legislation could impede negotiations on other key commercial issues.

We should also assume that China will retaliate against US exports of manufactured goods and farm products if Congress takes unilateral action. Weathering retaliation might be worth it, if it achieves anything. Legislation that won’t get us to the goal, yet will harm American exports and jobs, just doesn’t seem like a win, however.

Rather than punishing China by punishing ourselves—or Congress picking winners and losers—we need to focus on less divisive ways to get results. The Obama administration is on the right course. Sustained bilateral and stepped up multilateral engagement with China on this issue, as well as dealing with other global imbalances, is critical to addressing the fundamentals driving the US trade balance.

Dissatisfaction with China is high, but tariff legislation will not help China’s exchange rate better reflect market influences from trade flows. Let’s hope wiser minds prevail in the Senate. Engagement might not be politically expedient or feel like the right solution on the campaign trail, but counterproductive legislation will not help us reach the intended goals of the supporters of the House currency vote.

Name calling won’t get us there either. Since when did it become “un-American” to point out the fallacies of bad policy?

[author] John Frisbie is president of the US-China Business Council. [/author]

Posted by John Frisbie