Senate Panel Indicates Readiness to “Squeeze China” Over Currency

“A country builds its military strength on the back of its economic development.  The West has dealt China a hand with all aces.”

By John E. Carey
Peace and Freedom
July 27, 2007

On the eve of a landmark visit to China by U.S. Treasury Secretary Henry Paulson, the U.S. Senate’s Finance Committee voted 20-1 to force China to raise the value of its currency.

The Bush Administration opposes the legislation.

But that is no matter.

The president is weak, with some of the lowest approval ratings for any president, and the 20-1 committee vote indicates that the Senate may be able to offer currency legislation aimed at China that would survive any presidential veto.

On Tuesday and Wednesday we wrote about Treasury Secretary Henry Paulson’s trip to China next week under the headline, “To The U.S. Treasury Secretary: China Is Your Worst Nightmare, Sir” (see link below).

One would have to conclude that Secretary Paulson’s nightmare just got longer, scarier, and more convoluted.

“It is time to pass legislation that will have a real effect, and this bill will. A vote of 20-to-1 signals veto-proof support and shows the Chinese it is time to start playing by the rules,” said New York Democrat Senator Charles Schumer.

Senate Finance Committee Max Baucus, a Montana Democrat, said that China’s currency has been undervalued for some time, making Chinese goods very affordable in the U.S. while U.S. goods are overpriced and often go unsold in China.

The net impact of China’s undervalued currency is a trade deficit for the U.S. with China of a record $232.5 billion in 2006. That deficit will certainly be larger this year.

According to Reuters, “The bill would repeal current law requiring the Treasury Department to determine every six months whether a foreign country is manipulating its currency for a trade advantage, and replace it with a new semi-annual report identifying countries with ‘fundamentally misaligned currencies.’”

Politically, the Senate committee action on Thursday is a blow to the Bush Administration which has given China opportunities to act on its own before. Presumably, Treasury Secretary Paulson’s trip to China next week was meant to send the message to China that time was running out for it to act on its own.

Now Secretary Paulson will arrive among some of China’s leadership that undoubtedly will be insulted by Thursday’s Senate committee action.

A Treasury Department insider that asked not to be identified said to Peace and Freedom, “Why don’t they just make Treasury Secretary Paulson walk the plank? Why don’t they just shoot him? He is prepared, well prepared, for some rather tricky diplomatic activity, and now the U.S. Senate annoys the Chinese on the eve of the trip? Incredible. I don’t even know why we are going any more.”

Secretary Paulson may now be put in the position of smoothing ruffled Chinese feathers. China will believe it is being forced to raise the value of its currency by the U.S. Congress.

China would much prefer to be asked by America’s Chief Executive or act on its own.

A consultant in China told us, “The Chinese are very proud. It was not necessary to make a scene in order to achieve the U.S. goal. Now there is potentially bad blood between the two nations without reason.”

I asked my friend Les Lothringer in ShangHai to commment on the situation. Les is a veteran business consultant with over 30 years of commercial experience. He is president of West/Asia Strategy.

Les said, “Regrettably the US has been losing manufacturing capability for some two decades now, driven by short term policies. The danger is just not a misaligned currency but the loss of industrial capabilities, to the advantage of non-democratic regimes, among others. You might say that the West is indulging in riotous living.”

He ended with, “Any country that has no control over its manufacturing is under the control of any other country that supplies its essentials.  A country builds its military strength on the back of its economic development.  The West has dealt China a hand with all aces.”

Again we wish all the best to Secretary of the U.S. Treasury Paulson on his mission to China.

Related:
To The U.S. Treasury Secretary: China Is Your Worst Nightmare, Sir

China: No More Mister Nice Guy