William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.

The 2005 National Trade Estimate Report on Foreign Trade Barriers, issued by the US Trade Representative on March 30, states, “Opening markets for American goods and services either through negotiating trade agreements or through results-oriented enforcement actions is this Administration’s top trade priority.” Given that the U.S. trade deficit with China jumped to $162 billion in 2004, a increase of 30% over 2003, trade diplomacy with Beijing should be the very first item on USTR’s to-do list. And the fact that this trade deficit is also the most lopsided among America’s bilateral accounts, with imports running ahead of exports by a 5-1 ratio, should indicate some major trade barriers are in place against American producers.

This common sense observation is confirmed by the 57 page chapter devoted to problems with China. This chapter has grown some 50 percent in one year, containing 19 pages more than in last year’s report, indicating that the situation has gotten worse rather than better. Yet the issue that has been most prominent in business circles, the media, and Congress is missing: Beijing’s blatant currency manipulation is not mentioned. The USTR report states, “Four areas continue to generate significant problems – intellectual property rights, services, agriculture and industrial policies.”

While these are all serious problem, a list that does not include Beijing's mercantilist policies of predatory currency devaluation is far from complete. The  renminbi (RMB) is generally believed to be undervalued against the dollar by 40 perccent, making Chinese exports cheaper in overseas markets and American imports more expensive to Chinese buyers. Furthermore, when Beijing devalued the RMB in 1995, it did so to gain a competitive advantage over other Asian economies and in the process pushed the world economy towards the 1997 global financial crisis. So by any measure, currency manipulation is a major problem. But the only mentions of currency in the 2005 NTER involve minor items such as limits on foreign banks’ participation in local currency operations, and difficulties of acquiring RMB for private business transactions.

The response from the USTR as to why currency manipulation is not in the 2005 NTER is that the Treasury Department, not the trade office, handles currency matters. Yet, the USTR report mentioned other issues handled by other departments, such as the departments of Commerce, Labor and Agriculture, which affect trade. Also, in the 2004 NTER, the China currency issue is mentioned, albeit rather gently: “The new Chinese leadership continues to adhere to the policy of pegging China’s currency (the RMB) to the U.S. dollar, as it has done for the past 10 years....Throughout 2003, the Administration urged China, both bilaterally and in multilateral fora, to move toward a flexible, market-based exchange rate regime and to reduce controls on capital flows. Treasury Secretary Snow traveled to China for discussions with senior Chinese officials on a range of financial issues, including exchange rate policy.” The report went on to discuss of details of various attempts to “help” China see the advantages of flexible rates.

Dropping even this weak mention of the problem from this year’s NTER must be seen as another sign that the Bush Administration is trying to duck the issue and push it out of public view. Treasury Secretary John Snow has never tried very hard on the currency issue (or any other) with China.

In its December 3, 2004, “Report to Congress on International Economic and Exchange Rate Policy,” the Treasury played down the problem by trying to portray it as a technical problem rather a strategic confrontation. “The Administration has urged Chinese leaders to move as soon as possible to greater flexibility, and has initiated an unprecedented level of engagement with the Chinese government and other major trading partners of the United States to help bring this about. In September 2004, the Treasury held the 16th U.S.-China Joint Economic Committee (JEC) meeting in Washington to discuss progress on a broad range of economic and financial issues, including exchange rates and how greater flexibility would better enable China to conduct monetary policy.” The report adds, “The United States continues to work actively with China in identifying and overcoming impediments to greater exchange rate flexibility.”

Beijing does not see its exchange rate policy to be sign of weakness or stupidity on the part of supposedly uneducated financial strategists. China is a roaring success. As even the U.S. Treasury acknowledged, “China's economic growth rate accelerated in 2003 and into the first half of 2004, with particularly rapid growth in investment. The officially reported growth figure for 2003 was 9.3 percent, but estimates based on expenditure suggest that growth in 2003 was over 11 percent. China's official foreign exchange reserves grew by a net $67 billion to $471 billion during the first half of 2004. This growth in Chinese reserves is the counterpart of China's current account balance and net financial and capital inflows to the nonofficial sector. Foreign direct investment inflows in the first nine months of 2004 were $48.7 billion, up 21 percent from the comparable period in 2003.” According to the World Bank, China accounted for 88 per cent of foreign direct investment in the East Asia and Pacific region last year.

In comparison, U.S. foreign exchange reserves on April 1, 2005 were only $78.7 billion. But the Treasury keeps saying that “China has publicly stated its commitment to move to a flexible exchange rate regime” or that “China is laying the groundwork for a shift to a market-based, flexible exchange rate” in an attempt to allay concerns rather than address them. Whom are they trying to kid? A statement on the website of the Chinese embassy in Washington dated April 7 proclaims, “China is under pressure from some major trading partners to revalue its currency, which they claim is undervalued and has been giving Chinese exports an unfair advantage. The Chinese Government has insisted it will not resort to any simplistic revaluation of the currency but pledged instead to gradually improve the exchange rate forming mechanism.” At a Beijing press conference on April 7, foreign ministry spokesman Qin Gang responded to a question about the proposal of Senators Charles Schumer (D-NY) and Lindsey Graham (R-SC) to use tariffs to force China to relax its exchange rate policy by arguing that the United States should worry first about finding balance in its own economy.

Beijing has made it clear that it will determine for itself what best sustains its march to trade domination as the “workshop of the world.” It will not take “advice” from an America it sees as mismanaging its own economic affairs. It appears that in the test of wills Beijing has got the Bush administration on the run.  This is why Congressional actions, such as the Schumer-Graham bill in the Senate and a new bill in the House sponsored by Representatives Tim Ryan (D-OH) and Duncan Hunter (R-CA) – defining currency manipulation as a “market disrupting” policy subject to countervailing duties under existing trade laws, are so important in pressuring a lethargic administration to get back into the game and start defending American firms and workers from Chinese predatory tactics.

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