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rss Putting up the barricades Apr 22nd 2005 From The Economist Global Agenda America's Congress is taking a harsher line on trade, particularly with C hina. The Bush administration is also getting into the act, with the tre asury secretary and even the newly nominated trade representative talkin g tough. THESE are not happy times for the dwindling band of free-traders in Washi ngton, DC. Trade sceptics are on the move on two fronts: raising the bar ricades against the Chinese and refusing to lower them for the Central A mericans. Politicians blame China and its fixed exchange-rate regime for America's trade deficit. But Congress is also sceptical about the Central American Free Trade Agreement. Although CAFTA is small beans in economic terms, failure to get it through would spell ill for any global trade deal at t he World Trade Organisation (WTO). Not only is the legislation ut terly against WTO rules, it would cause havoc for the American economy. But Mr Schumer has been promised a vote by July, and his bill may well p ass the Senate.
The Schumer bill's success, which has surprised even its sponsor, is acce lerating other measures. Two more senators, Susan Collins and Evan Bayh, are touting the Stopping Overseas Subsidies Act, which would allow Amer ican firms to get countervailing duties to make up for Chinese subsidies , including a subsidised exchange rate. China is not currently subject t o America's anti-subsidy law as it is deemed a non-market economy (whi ch makes it easier for American firms to file anti-dumping cases against it). But declaring China a market economy for the purposes of subsidies , and a non-market economy for the purposes of anti-dumping, is against WTO rules. Nobody in Congress, alas, seems to care about breaking WTO rules. Mr Bayh is holding up the con firmation of Rob Portman, the Ohio congressman whom George Bush has nomi nated for US trade representative, until his bill is voted on. Meanwhile , in the House of Representatives, Duncan Hunter, a conservative Republi can, and Tim Ryan, a Democrat, have cooked up a law that allows American companies to use exchange-rate manipulation as a reason for demanding protection under America's trade laws. And the Congressional China Curr ency Action Coalition has filed a Section 301 petition asking the Bush a dministration to file a formal case to the WTO complaining about the yua n In the 1980s, a rising trade deficitat that time with Japanfuelled prot ectionist pressure in Congress. Ronald Reagan introduced the notorious voluntary export restraints on Japanese steel and cars. The Reagan team also abandoned its laisser-faire attitude to currency markets and, thro ugh the Plaza Agreement, engineered a sharp drop in the dollar. The current bout of China-bashing is not a replay of the 1980s. Back then , large American firms, particularly the Detroit car giants, led the cla mour for protection. Now big business, which relies heavily on Chinese i nputs, is quieter. A nd even the noisier business groups, such as the National Association of Manufacturers, are relatively nuanced. Though the NAM wants Beijing to revalue the yuan, it does not support the Schumer bill. Less encouragingly, the political and economic risks are bigger this time round. In the 1980s Japan, for all its faults, was always viewed as a d emocratic ally in Asia. By contrast, China is now seen as a nasty commun ist regime and a dangerous rival. In the mid-1980s, America's current-ac count deficit was smaller, 35% of GDP in 1985 compared with 63% today, and its debt stock lower. Today, America is the world's biggest debtor, with China as an important creditor. A sharp reversal in China's appeti te for American Treasury bonds could send interest rates soaring. This might come sooner rather than later, according to Alan Greenspan, th e chairman of the Federal Reserve. In testimony before the Senate budget committee this week, he stated that the Chinese governments massive ex change-rate interventions were causing growing imbalances in the domesti c economy that will force China to abandon its currency peg. Once this h appens, the central bank can stop stockpiling dollar reservesmeaning it s demand for American government securities will also dry up. Critics wo nder if Congress, which has made little effort to curb Americas soaring budget deficits, has quite thought things through. For now, the Bush administration seems to be trying to muddle along. It h as increased its rhetoric about the need for China to fix its exchange r ate. It said this at the G7 meeting of finance ministers on April 16th, and, when the Treasury issues its twice-yearly report on currencies late r this month, it is likely to come close to calling China a currency ma nipulatora term last applied to Beijing in 1994. Even Mr Portman, an a rdent free-trader, sounded a harsh note on China during an appearance be fore the Senate finance committee on April 21st. Saying that the Chinese do not always play by the rules, he promised to take a firmer stance than his predecessor, Robert Zoellick. This seems to have garnered appro val on both sides of the aislethough not from Mr Bayh, who said that wo rds were no substitute for action. The Bush team hopes to keep this sort of grandstanding to a minimum. At worst, this frenzy c ould result in a series of illegal (in WTO terms at least) protectionist bills becoming law. Even if things do not get that far, the China effec t will complicate an already tough struggle to get CAFTA through. Aside from a handful of passionate free-traders, Democrats are solidly op posed to the Central American trade deal, thanks largely to a massive lo bbying campaign by the unions. The unions believe (correctly) that if CA FTA is defeated, Mr Bush's trade agenda will lie in tatters. In the face of determined union opposition, Mr Bush is already having trouble persu ading many Democrats. Alarmist news about imports from China makes this task much harder. Another set of CAFTA scepticsthe textile lobbyought to be brought on bo ard by fears of China. The Central American agreement is in part a way o f staving off Chinese textile imports, which have surged since the quota regime ended this January. Without CAFTA, Central America's textile ind ustry is likely to be decimated by Chinese competition. With the special duty-free access that CAFTA grants, Central American textile firmsand the American companies that supply them with materialmay survive. The Bush team is busy making this argument to textile groups.
The White House is thus getting more overt with its bribes, such as its decision to consider saf eguard quotas against Chinese imports for several textile products. Outrageous import quotas keep the domestic price of sugar at double that of the world price. CAFTA would allow more imports in fr om Central American countries, but still less than 2% of US sugar produc tion. For the sugar lobbyand the 15 or so Republican politicians who fo llow its biddingthat is still too much. The betting is that, with enough presidential involvement and vote-buying , Mr Bush may get CAFTA through in the next couple of months. Until he d oes, there will be little appetite in the White House to give the China- bashing in Congress the cold shoulder that it deserves.
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