Designed to get up a politician’s nose
THIS was supposed to be a good week for American trade policy. On October 3rd Barack Obama submitted three long-stalled trade agreements to Congress for ratification. Republican and Democratic leaders promised speedy passage. If all goes as planned, the pacts with Colombia, Panama and South Korea could be ratified in time for a state visit on October 13th by Lee Myung-bak, the Korean president.
But that advance for trade was tempered by a revival of protectionism against China. Also on October 3rd the Senate voted by an overwhelming and bipartisan 79-19 to proceed with a bill that would punish China for keeping its currency artificially low. The legislation enables a company to demand an investigation of a country it thinks is using an undervalued currency for unfair trade advantage. If the government concludes that the currency is indeed “fundamentally misaligned”, countervailing duties could be imposed. China, predictably, has given warning of dire consequences if the bill becomes law; “waves of trade protectionism that would favour nobody”, declared Xinhua, a Chinese government-controlled news agency.
A similar bill in the House of Representatives has more than enough co-sponsors to guarantee passage, if it gets to a vote. However, Republican leaders in the House, who like free trade more than do their rank and file, are not inclined to act; John Boehner, the Republican speaker of the House, called the bill “pretty dangerous”. A similar bill passed the House last year, and versions of it have repeatedly made progress in the Senate, but none has yet reached a president’s desk for signing. Mr Obama has also kept his distance. Despite frequent tough talk, his Treasury department has, in its twice yearly currency reports, declined officially to label China a “currency manipulator”.
Congressional threats are a useful crowbar for extracting concessions. China first allowed its tightly controlled currency to rise in 2005 when the Senate was on the verge of passing a similar measure. The rise came to a halt in 2008 when the Chinese authorities sought to cushion exporters from the turbulence of global recession but resumed in 2010 just weeks before the House passed a bill (see chart). After rising 7%, the yuan again stopped appreciating in early August as the world economy threatened to come unglued and as investors fled the euro for the dollar, which rose sharply on a trade-weighted basis.
There are reasons to believe that the yuan is not as obviously undervalued as it once was. Fiscal and monetary stimulus, which jolted domestic demand, has caused China’s current-account surplus to narrow dramatically, from 10.1% of GDP in 2007 to a projected 2.9% this year, according to Nomura, a financial services group, which sees it almost disappearing by 2013. Nevertheless, the protectionist threat in America remains very much alive. America’s trade deficit with China continues to widen. Mitt Romney, the front-runner for the Republican presidential nomination, has said that on his first day in office he would order China to be designated a currency manipulator in preparation for imposing punitive duties.
Public hostility to free trade has risen, and has been matched by growing political truculence, notes the report of a task force of trade experts organised by the Council on Foreign Relations. Presidents have relied on their fast-track Trade Promotion Authority (TPA) to negotiate pacts that Congress can ratify or reject but not amend. But Congress has declined to grant the Oval Office TPA power since its expiration in 2007. The report says Mr Obama himself violated the spirit of the TPA by insisting on further concessions from Colombia, Panama and Korea, whose trade agreements were negotiated by George Bush in 2006-07. It could be years before free traders have another deal to celebrate.