The Omnibus Trade and Competitiveness Act of 1988

The Omnibus Trade and Competitiveness Act of 1988 requires the Secretary of the Treasury to determine whether foreign countries manipulate their exchange rates with the U.S. dollar for the purpose of “gaining unfair competitive advantage in international trade.”

Just how far the Treasury will go to avoid doing its job was indicated by the testimony of Treasury Deputy Assistant Secretary Mark Sobel at the May 9 House hearing. He made the astounding argument, that “the ‘intent’ of the country in question is a consideration, as it is inherent in the language of the act.


The U.S. goods trade deficit with China was $232.5 billion in 2006, an increase of $31 billion over 2005, ...


U.S. Policy Elites Supine in the Face of Chinese Trade Cheating
William R. Hawkins
Tuesday, May 15, 2007

An unusual joint hearing on currency manipulation and its effects on U.S. businesses and workers was held in the U.S. House of Representatives on March 9. Three separate Committees were involved: the Ways and Means Subcommittee on Trade; the Financial Services Subcommittee on Domestic and International Monetary Policy, Trade, and Technology; and the Energy and Commerce Subcommittee on Commerce, Trade and Consumer Protection. China and Japan were both subjects of the hearing, although the main reason for including Japan was to avoid the appearance of ganging up on China.

China did deserve to be the real center of attention. The U.S. goods trade deficit with China was $232.5 billion in 2006, an increase of $31 billion over 2005, and an amount that accounts for over one-third of the entire U.S. trade deficit. Chinese trade continues to be extremely lop-sided, with U.S. goods exports of only $55.2 billion in 2006 against imports of $287.8 billion – more than a 5-1 negative ratio.

There are a number of reasons for China’s economic boom – and America’s poor showing. Economists have estimated that the RMB is undervalued by as much as 54 percent, according to a recent survey by the Congressional Research Service. In July 2005, China began to allow the RMB to appreciate. On paper, it is up 7.3 percent since then, but as Federal Reserve Chairman Ben Bernanke has stated, the situation “has likely worsened recently” with the RMB’s trade-weighted effective real exchange rate having fallen about 10 percent over the past five years. He has described China’s currency policies as a “subsidy to exports.” Beijing accumulates foreign exchange reserves by intervening in international currency markets to maintain its arbitrarily fixed exchange rate. As a result, the Government of China today holds more than $1.2 trillion in foreign exchange reserves, compared to U.S. foreign exchange reserves of approximately $69 billion.

The Omnibus Trade and Competitiveness Act of 1988 requires the Secretary of the Treasury to determine whether foreign countries manipulate their exchange rates with the U.S. dollar for the purpose of “gaining unfair competitive advantage in international trade.” Such a finding would require the Treasury Secretary to initiate negotiations on an “expedited basis” for the purpose of eliminating the unfair advantage. The Treasury Department has repeatedly declined to find that either China or Japan manipulates the rate of exchange. The Treasury Department was required to submit its most recent report to Congress on April 15, but it is overdue.

The Office of the U.S. Trade Representative (USTR) also has decided not to investigate China’s currency practices under Section 301 of the Trade Act of 1974, or to initiate a WTO case to address these practices. It has also rejected attempts by affected industries and Members of Congress to initiate cases. The USTR holds that this is an issue to be handled by the Treasury. The Treasury has “engaged” China on the currency issue for the last five years, most recently under the new “Strategic Economic Dialogue” (SED). The first SED took place in Beijing last December. The next session of the SED will begin in Washington on May 23, but nothing should be expected from it. It is merely “chit-chat diplomacy” meant to avoid the kind of serious, results-oriented negotiations that would be called for under a Treasury finding against China.

A year ago, then Treasury Secretary John Snow seemed to be losing patience. He said in May, 2006 that “if current trends continue without substantial alteration, China's policies will likely meet the technical requirements of the statute for designation.” But he was then replaced by Henry Paulson, the former CEO of Goldman Sachs, the most active investment bank in China. Paulson, who made a fortune helping build Chinese economic strength, has no desire to confront the monster he helped to create.

At a May 2, 2007 event at the Peterson Institute of International Economics (PIIE), Paulson said, “I hesitated to take this job because I could see the protectionist sentiment in the US, and nationalism and protectionist sentiment in China’s local elections and in selecting the State Council this Fall, and elections in the US, and therefore the likelihood of legislation.” As a transnational banker, he does not want to deal with issues on a national interest basis. In other words, he doesn’t want to do his job.

Just how far the Treasury will go to avoid doing its job was indicated by the testimony of Treasury Deputy Assistant Secretary Mark Sobel at the May 9 House hearing. He made the astounding argument, that “the ‘intent’ of the country in question is a consideration, as it is inherent in the language of the act. Determining intent behind the policy can be difficult to assess.” Is it that difficult to assess Beijing’s intent – when it is using every tactic known to international commercial competition to grab the largest share of world markets? If Paulson’s department cannot understand (or admit) such a fundamental fact, nothing can be expected of it – which is why Congress needs to act.

At the May 9 hearing, C. Fred Bergsten, Director of PIIE, testified that, “A substantial increase in the value of the Chinese currency is an essential component of reducing the imbalances. A recent joint study of the imbalances by leading think tanks in Asia and Europe, along with the Peterson Institute for International Economics, concludes that the RMB needs to appreciate by at least 35 per cent against the dollar. However, China has blocked any significant rise in the RMB by intervening massively in the foreign exchange markets, buying $15-20 billion per month for several years to hold its currency down....China is thus overtly exporting unemployment to other countries and apparently sees its currency undervaluation as an off-budget export and job subsidy that, at least to date, has avoided effective international sanction.”

Bergsten’s organization has been a leading exponent of “free trade,” yet he couched China’s actions as a threat to that doctrine. Bergsten’s fear is that this bad behavior by Beijing will produce a general backlash against free trade, so it must be corrected – but only by means that do not discredit free trade. “The goal of US adjustment should be to cut our global current account deficit to 3-3 ½ percent of GDP, about half its present level, at which point the ratio of US foreign debt to GDP would eventually stabilize and should be sustainable. The United States should take the lead in addressing the imbalances by developing a credible program to convert its present, and especially foreseeable, budget deficits into modest surpluses, like those that were achieved in 1998-2001. Such a shift, of perhaps 3-4 percent of our GDP, would reduce the excess of our domestic spending relative to domestic output and the shortfall of our domestic savings relative to domestic investment. Fiscal tightening is the only available policy instrument that will produce such adjustments.”

In other words, we should slow down our entire economy, risking a recession, in order to reduce imports. Talk about letting the tail wag the dog! Proper policy should focus on fixing trade to protect the larger economy from harm. Bergsten’s macroeconomic approach avoids dealing with trade (or China) directly because it does not fit his ideology. It is also old thinking, tied to the “twin deficits” notion popular in the late 1980s. Yet, during the very period Bergsten cites, 1998-2001, the U.S. trade deficit increased by over $200 billion (48%) even as the country slid into a mild recession. Indeed, 1997 is one of those major turning points in trade trends, with the deficit exploding in the years since. Trade has to be dealt with on its own terms if the imbalance is to be corrected.

Donald Evans, the former Commerce Secretary now CEO of the Financial Services Forum (Paulson is a former FSF Chairman), made a common argument meant to let Beijing off the hook. He testified that “an immediate shift to a market determined yuan is not possible given the underdeveloped state of China’s capital markets.” Yet, Beijing sets the value of the RMB by fiat. It devalued the yuan in 1994, moving from a peg against the U.S. dollar of 5.8 to 8.7. This Chinese devaluation was a major factor in triggering the Asian financial crisis of 1997, as they got a substantial jump on their Asian trade rivals.

The proper aim of U.S. policy is not to get Beijing to adopt a freely floating exchange rate, as it is an objective beyond reach. The aim is to get Beijing to revalue the RBM to a higher rate that will eliminate its unfair trade advantage. It can do this again by fiat. If Beijing is unwilling to do this, then the United States should impose countervailing duties on Chinese exports to offset the unfair advantage and allow American manufacturers to compete on an equal basis.

The House hearing revealed that the real barrier to dealing with China, and trade in general, is the failure of our political elites to understand that this is a competitive struggle that will mold the future shape of the world - economically, politically, and militarily. Washington needs to play to win, using every commercial tactic that its currently stronger economy can bring to bear, rather than continue to sit out the contest, letting other governments rig the game and make gains at the expense of domestic American manufacturers and their employees.





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

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