US curb on China imports may be aimed at lawmakers, yuan
(Bloomberg)
Updated: 2005-05-16 10:53

The latest US maneuver in its trade conflict with China has a narrow target on its face: limiting three types of textile imports. It may also have the wider aim of influencing US lawmakers who are debating trade legislation and Chinese officials who set the country's currency policies.

President George W Bush's administration likely is counting on its move to impose quotas on Chinese trousers, shirts and underwear having a secondary impact on members of Congress considering both protectionist measures and a free-trade agreement with Central America, according to former US Trade Representative Clayton Yeutter.

And the greater willingness of US politicians to consider trade sanctions is in turn pressuring China to reconsider its policy of pegging its currency to the dollar, said Michael Woolfolk, senior currency strategist at the Bank of New York.

"We saw a notable change in the tone of the rhetoric on currency revaluation from China as soon as the US Congress began talking about protective tariffs earlier this year," Woolfolk said.

Chinese officials say they can't be pressured into changing the policy of pegging the yuan at 8.3 to the dollar, which critics say undervalues the currency and gives Chinese exporters an unfair advantage. US officials from Bush down have pressed for a revaluation as a way of cutting the US trade deficit with China, which grew 42 percent in the first quarter of 2005.

"The louder the US screams, the more speculation, the more China will not move on the yuan," said Hu Biliang, a senior economist at the Chinese Academy of Social Sciences and a government advisor on trade issues.

'Trap' for China

Hu said a quick revaluation constitutes a "trap" laid for China by currency speculators. "Why should China fall into this trap?" he said. "It is when speculators go away, that is when the government will move."

The relationship between surging Chinese imports -- which grew this year by as much as 1,500 percent in some types of textiles -- and China's currency policy is undeniable, said Peter Morici, who was top economist of the US International Trade Commission from 1993 to 1995.

"The whole trading relationship with China is colored by the fact that they have an undervalued currency," said Morici, a professor of business at the University of Maryland in College Park. China's effort to keep its currency pegged to the dollar shaves about one-third of the price off its exports, he said.

The May 13 US move to limit the annual growth of imported cotton shirts and trousers and man-made fiber underwear from China to 7.5 percent annually is a reflection of the economic disruption such imports have wrought, according to Jock Nash, a lobbyist for Spartanburg, South Carolina-based textile manufacturer Milliken & Co.

Little Impact Expected

Nash said he doesn't think the new textile quotas will have much impact on Chinese currency policy. "They're going to revalue their currency when they damn well please," he said. "They're 5,000 years old, and they can do what they please."

Morici also doesn't foresee much impact because "what many of us expect is an inconsequential revalue."

China has pegged the yuan at 8.3 to the dollar since 1995. As the dollar dropped 14 percent against other currencies during the past three years, China's currency depreciated by the same amount. China's Deputy Minister of Finance Li Yong said on May 6 that the government is "working very hard" to revise its exchange-rate system, though no decision has been made on the format or timing of the revision.

Currency and Trade

The Treasury Department is expected in coming days to release its biannual report on foreign exchange markets and probably won't designate China a currency "manipulator," said David Gilmore, a partner with Foreign Exchange Analytics in Essex, Connecticut.

"That would start the wheels in motion for a formal review and congressional hearings, and the Bush administration is eager to keep that door closed," Gilmore said. "Turning over the politics of the China trade issue to the Congress can't be helpful because of the drift there toward protectionism."

That drift is reflected in legislation introduced by Senators Charles Schumer, a New York Democrat, and Lindsey Graham, a South Carolina Republican. Their measure would impose a 27.5 percent tariff on all Chinese imports unless China undertakes a currency revaluation within 180 days.

Underlying Causes

A spokesman for Schumer, Israel Klein, said the administration's move to impose some textile quotas was probably an attempt to deal with the issues that gave rise to the Schumer-Graham bill. He said he doubted the move would weaken support for the measure because narrowly crafted quotas would not deal effectively with the underlying causes of the problem.

"I think it's an effort to address the concerns that we've been bringing up," Klein said. "I don't think it dilutes support for our bill."

Apart from the Schumer-Graham legislation, four complaints alleging unfair Chinese trading practices in textiles are pending before the Commerce Department, and the US government has begun what it calls a top-to-bottom review of trade relations with China.

Opposition from Retailers

The quota limits are opposed by US retailers that rely on apparel from China, including Wal-Mart Stores Inc, Gap Inc and Perry Ellis International Inc, according to a March 18 report by Wachovia Securities analyst Joseph Teklits, based in Baltimore.

If the attitude among many in the US is that China is competing unfairly, a common view from China is that Americans are trying to have it both ways: benefiting from low Chinese labor costs and then complaining about the results.

"China's cheap labor has helped sustain the standard of living of the US middle class," said Guan Anping, a managing partner at the Beijing-based law firm Anping & Associates and a former government advisor. "Cheap exports keep companies like Wal-Mart and Kmart profitable. Why can't the US recognize this fact?"

Guan said the overall economic landscape is still tilted heavily in favor of the US because it enjoys "a huge trade advantage" in technology. "All Chinese companies do is produce high volumes of low-tech for low profit margins, while it is the US companies that earn high-tech, high margins," Guan said. "Now the US Congress wants to take away even the low margins of Chinese companies."

The Chinese government has said it may retaliate against US restrictions on Chinese textile imports.

These threats and counter-threats have been "brewing for years' because of a trade relationship that has been out of balance for some time, said Woolfolk, the Bank of New York strategist.

"These are negotiating tactics, and it is in neither country's best interest to get involved in this kind of escalation, but it's necessary to be able to determine the terms of things in the future like the yuan's revaluation," he said.

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