May 15, 2007    Volume 14, No. 9

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Main Street Versus Wall Street: Asian Currency Manipulation Riles Members Of Congress


Currency manipulation by Asian countries is becoming a big political issue among members of Congress worried about the loss of good jobs in their districts. In a set of two hearings held May 9 involving three House subcommittees, something believed not to have been done before, both Republicans and Democrats expressed concern over the Bush administration's policy of not citing Japan and China as countries manipulating their currencies. The practice provides those countries' export-oriented industrial companies a substantial advantage over American industry, leading to the destruction of U.S. jobs, cities and towns, they said.

One member of Congress, Rep. Brad Sherman (D-Calif.), described the $233-billion trade deficit with China as being "the most cancerous and lopsided trade relationship in the history of mammalian life." China's currency practices amount to "criminal" behavior, Sherman told members of the Bush administration. "There are people in my district who lost their jobs as a result of the Chinese currency manipulation, became an alcoholic and committed suicide. Usually when a crime is committed and death results, police action is immediate."

In hearings that were contentious, serious, educational and long, only a few speakers defended a go-slow approach to confronting China and Japan, mainly Republicans from non-industrial districts and Steven Roach, chief global economist for Morgan Stanley. "Everyone wants to bash China here," said Roach at one point during the proceedings. China is making progress, he argued. Its policies are benefiting Americans through lower consumer prices and lower interest rates. Even if China realigned its currency, the U.S. would still maintain a huge trade deficit.

"We can't delude ourselves into thinking that we can have a bilateral fix for a multilateral problem," Roach said. "That is flawed macroeconomics. I sincerely worry that you in the Congress are moving into very dangerous territory if you contemplate trade legislation aimed directly at China. I fear this approach could backfire and unleash forces that would have an adverse impact on the U.S. economy and on middle-class American workers." Forcing the issue, he insisted, "could be a major policy blunder of monumental proportions."

That sentiment was not shared by the majority of others testifying, who said that continuing with the status quo could lead to an economic situation equal to what occurred in the 1930s.

Things got especially dicey in the afternoon when Bush administration political appointees from the Departments of Treasury and Commerce and the USTR made an appearance that frustrated committee members. Congress had invited Commerce Secretary Carlos Gutierrez, Treasury Secretary Henry Paulson and United States Trade Representative Susan Schwab to testify, given that the three committees calling the hearing -- Energy & Commerce, Ways and Means and Financial Services -- have jurisdiction over those agencies. Instead, the people sent to answer questions (or not answer them) were assistant deputies. Sources involved in the hearings said sending unknown political appointees before an historic hearing amounted to a snub by the Bush administration and one that will not soon be forgotten. Compounding the faux pas was the fact that the three invited Bush cabinet members met privately the previous day with representatives from the National Association of Manufacturers, a fact that was made known in a press release handed out at the hearing.

"I hope that our subcommittees from three exclusive House committees coming together today will send a powerful message to the administration that Congress is serious about the problem of currency under-valuation in Asia and that we intend to put turf battles aside and focus on resolving this matter most important to our economy and the well-being of our workforce," said Rep. Luis Gutierrez (D-Ill.). "Even more, I hope this hearing will send a strong message to U.S. manufacturers and American workers -- we hear you and we're serous about tackling this problem."

Rep. Barney Frank (D-Mass.) said there is a growing disconnect between strong economic growth and workers "who are not profiting from it." Addressing currency manipulation will be one way of increasing the wellbeing of the average American worker, he added. "We are going to act. Those of you who don't think this is the way to deal with it, in your own interest you ought to come up with another."

John Dingell, chairman of the House Commerce Committee, said that Japan's currency manipulation amounts to an export subsidy that is providing Japanese automobile makers with a price advantage that amounts to $2,400 for a $20,000 vehicle. The situation "must be dealt with decisively," said Dingell. Mustafa Mohatarem, chief economist at General Motors, said later that the subsidy amounts to as much as $14,000 on a full-utility vehicle.

The morning hearing pitted two manufacturing company CEOs being adversely harmed along with representatives from labor and GM against Roach, who was in the unenviable position of throwing cold water on Congress's desire to act. C. Fred Bergsten, director of the Peterson Institute for International Economics, came down on the side of action -- at least in the case of China, if it doesn't move on its own quickly. Former Commerce Secretary Don Evans, now CEO of the Financial Services Forum said the real issue is China's unwillingness to open its market to financial services, noting that 500 million Chinese have cell phones while only 1 million have credit cards.

Roach insisted that U.S. economic problems rest squarely on America's shoulders, reflecting the country's unprecedented shortfall of savings, which averaged only 1 percent over the past three years, "the lowest in the history of any leading nation in the modern-day world economy."

Other panelists weren't buying it. It's wrong to insist "that the United States is doing something wrong and that we're at the mercy of Japan and China," countered Mohatarem of General Motors. Asia's strategy of export-based growth "produces the excess savings, which are being invested in the U.S. at very low rates. Why are foreigners earning a much lower rate of return on the investments in the U.S. than Americans earn abroad? The answer is that the driver of the Japanese, Chinese and other Asian investment in the U.S. is not a desire to earn a higher rate of return but to support their exports. So a change in policy necessarily will mean a change in their export-based growth strategy. It's not necessarily our problem. It will cause some changes in the U.S., but let's face it -- we are letting foreign countries distort our economy."

William Hickey, president of Lapham-Hickey Steel of Chicago, took issue with Roach's analysis that a big part of the problem is the U.S. budget deficit. Over the past 10 years, U.S. fiscal policy has produced deficits, surpluses and deficits. Yet every year, the trade deficit with China has worsened. "So the theory is great, but the theory doesn't work when other countries intervene," he said. "We are now importing 8 or 9 percent of Chinese GDP. This is a rigged game. Anybody who doesn't understand this has to have their head examined."

Hickey said he discovered six years ago that Chinese competitors were selling finished products to his customers for the same price his customers were paying for raw materials, and that currency was one of primary reasons for this discrepancy. He started raising the issue with politicians. "Every time this administration was pressed for some action on the currency, those pushing for action were either insulted or ignored," he told members of the three committees. "Now that the control of Congress has changed parties, we have a Department of Commerce that has conceded that non-market economies employ massive domestic and export subsidies. Now that the control of Congress has changed parties, we have a USTR that starts trade cases in the WTO against China. If control of this body had not changed, does anyone in this room believe that the administration would have taken any of these recent actions? We as a country need laws that ensure our companies and employees are not going to be destroyed by a policy of neglect by any administration at any time."

After listening to the testimony, Rep. Gutierrez described the discussion as being a "dichotomy" between Roach representing the financial interests of Wall Street and Hickey and Brian O'Shaughnessy, president of Revere Copper Products, as representing employers manufacturing goods. "I think we're going to have to make a decision of who we're going to listen to -- Wall Street or Main Street -- those who actually develop and produce jobs for people" versus those who provide financing, Gutierrez said.

Roach countered that this is a false choice. Consumption has reached 71 percent of the U.S. GDP. "There has never been an example of a major economy that has consumed more of its national output than we're doing in the United States right now," he said. "So the idea of Wall Street versus Main Street misses the basic point. This economy is enjoying a consumption excess, the likes of which we have never had. We don't save, and then we're demanding that others who provide us with the saving play by our rules. Something is wrong with this movie." The way to solve this problem is by reducing the budget deficit and by adopting a consumption tax, Roach insisted.

Roach's comments raised the ire of Rep. Don Manzullo (R-Ill.), a champion of manufacturing interests in Congress over the past six years and a self-described "free trader." "With all respect Dr. Roach, questioning a country's monetary policy is not bashing that country any more than questioning the United States's approach to China, and what we think may be a mistake or improper is not bashing the United States," Manzullo said when he finally had his five-minute period for questioning. "We represent millions of people, thousands in my congressional district, who have lost high-paying manufacturing jobs. I don't bash any country. I'm in pursuit of the truth and I think Dr. Roach, you should remove from your remarks the fact that you accuse us of bashing China. That's not correct. We're just trying to seek the truth and do the best for the people that we represent."

Manzullo then scolded former Commerce Sec. Evans for characterizing China's economy as being "under-developed" and too fragile to withstand a substantial adjustment of its currency. "I think when you say that, you encourage the Chinese to do absolutely nothing and not to grow up," Manzullo said. "I've met a lot of Chinese and they're graduates of the same colleges you guys went to. They know the system better than we do. In fact, they're investing in our markets and making more money than we are. They understand the system. But at the same time, if they can develop a sophisticated rocket so precise that it can knock a satellite out of the sky then they cannot say their economy is underdeveloped. We have to realize we are actually dealing with a very sophisticated country."

Brian O'Shaughnessy of Revere Copper Products Inc. said there is nothing theoretical about undervaluing a currency in order to subsidize manufacturing. "That's what nations do in order to gain a competitive edge, to employ their people, to build up the kind of manufacturing infrastructure -- that base, that strength, that national security," he said. "In my dealings in international business, any time I was involved with a customer or a competitor and their nation's currency was valued lower, they were really excited. Manufacturing companies in countries that have that happen get really excited because they know it gives them a competitive edge."

The afternoon session with three Bush administration officials was a testy affair, with numerous members of Congress voicing displeasure with the Treasury Department's unwillingness to designate China as being a manipulator of its currency.

"It has not been our view that the Chinese policies are designed for the purposes of gaining unfair competitive advantage," said Mark Sobel, deputy assistant secretary for international monetary and financial policy at the Treasury Department after being blistered by questions about the agency's bi-annual report on the subject. "Our view is that China is part of a highly competitive East Asian economy, and that a Chinese upward movement in the currency may not have much impact in affecting the bilateral deficit." China has an unusually high surplus with the United States because it has a high savings rate, Sobel told leery members of Congress.

But it doesn't mean that the Treasury Department is happy with China, either. Far from it. "We're totally frustrated with the pace of reform in China," said Sobel. "We are not satisfied at all with the movement -- the upward movement in the RMB, nor are we satisfied with the degree of currency flexibility that exists in the exchange system. And I can assure you Sec. Paulson pushes extraordinarily hard on this issue."

Rep. Tim Ryan (D-Ohio), who has sponsored legislation addressing currency manipulation, said that his legislation has strong bipartisan support and is intended to give the administration a tool it needs to more effectively deal with China. "We're trying to help you," Ryan told Sobel. "We're on the same team."

But thousands of people in America are losing their jobs. School systems "can't pass levies because of this," Ryan said. "This is what this is coming down to. This isn't a theory....It's gotten to the point where we're going to need congressional action."

Rep. Sander Levin (D-Ill.), chairman of the Ways and Means Committee's trade subcommittee and chairman of the hearing, said the day's event sent a "clear message" to both the Bush administration and those countries manipulating their currencies. "I think there is movement here. I think there's a growing awareness that the status quo won't work....This testimony is going to accelerate the consideration of legislation."

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