The Senate Finance Committee voted 20-1 this afternoon to send some “anti-pussyfooting legislation,” as John Kerry dubbed it, to the full Senate. I know because I was there for all the action at the lovely Dirksen Building. I also ate at the all-you-can-eat buffet in the basement and had a little bowl of Senate bean soup. Big fun.
The “markup” of the bill happened shockingly fast: The meeting started at 3:00 (the photo at left is of the line of lobbyists etc. waiting to get in), and there was some kind of vote on the Senate floor at 3:45, so Chairman Max kept things moving right along. He let the mom in tennis shoes explain why she was voting no and the old Kentucky fireballer explain why he had wanted the bill to be even more anti-pussyfooting than it was and TV Chuck, who together with Lindsey Graham (sorry, all out of nicknames) got this whole anti-pussyfooting campaign going a couple of years ago, gloat a little. But that was about it. Then, bam, they voted and left. Something makes me think this thing is going to pass, and overcome the near-certain presidential veto, without much trouble.
The alleged pussyfooting that the legislation seeks to prevent is being committed by the Treasury Department, which was commanded by the 1988 Trade Act to scour the earth in search of countries manipulating their currencies to gain a competitive advantage, then cite the offenders and try to make them stop. Treasury actually did this in the early 1990s with Taiwan, South Korea and China, but has professed to find no offenders since 1994.
Lately, though, China has been running a huge trade surplus with the U.S., and Congresspeople have been feeling a lot of pressure to do something about it. And because China does in fact manipulate its currency by allowing it to fluctuate only slightly against the dollar, and by most estimates the Chinese remninbi is now significantly undervalued against the dollar, it is currency that has become Capitol Hill’s obsession.
There is the complication that, during the Asian currency crises of the late 1990s, China’s resolve in maintaining the remninbi’s link to the dollar actually cost it export business and was wildly applauded on Wall Street and in Washington. That’s probably one reason why Treasury has been so reluctant to label China a manipulator. Another is that the folks there seem convinced that taking a tough line with Beijing will backfire (which was also Maria Cantwell’s avowed reason for voting no on the bill). And some people might say Treasury is a tool of the big New York investment banks, which want nothing so much as for the current status quo with China to continue forever and ever regardless of its impact on U.S. manufacturers. But I wouldn’t say that. Well, maybe a little.
The bill reported out of committee today would remove much of Treasury’s discretion and leeway. Now the standard will no longer be manipulation but “fundamental misalignment,” which means “a significant and sustained undervaluation of the prevailing real efffective exchange rate, adjusted for cyclical and transitory factors, from its medium-term equilibrium.” And if there is such a misalignment, then all sorts of stuff that I don’t fully understand is supposed to happen involving the WTO, the IMF, and probably CONTROL.
The bill has been portrayed as the second coming of Smoot-Hawley, the infamous tariff act of 1930 that probably worsened (and maybe helped cause) the Great Depression, but that strikes me as wildly exaggerated. The original Schumer-Graham bill, which called for 27.5% tariffs on Chinese imports if China didn’t revalue its currency, was Smoot-Hawleyish, but Chuck Schumer said today that it was never meant as anything but a bargaining chip.
“In the end what all of us want is simply for a bill to become law that will cause the Chinese to take action,” he said during the markup. Afterwards I corralled him (not hard to do; it was just after he left the gaggle pictured at left), and he elaborated: “I don’t believe the Chinese move out of a sense of comity and magnanimity. They are a mercantilist state.”
Yeah, whatever. I can totally understand why people in Congress feel the need to do a bit of saber-rattling with China, and this strikes me as relatively harmless saber-rattling. But I also understand that there are a bunch of non-mercantilist reasons why China wants to go slow on adjusting the remninbi and even slower on letting it float freely. And I also think that, even if the RMB goes up 40% against the dollar, we’ll still run a huge trade deficit with China.