September 22, 2010

M10-036

To: SPEEA Council

From: SPEEA Legislative and Public Affairs Committee

Subject: Pre-Submitted New Business: Support policies that prevent manipulation of China's currency

Background

Over time, countries will run a trade deficit or trade surplus. One way free markets respond to a trade surplus or deficit is by adjusting the currencies of different countries, increasing the price of goods produced in countries with a surplus, and decreasing the price of goods produced in countries with a deficit.

America's trade policy is based on free trade and free markets. China's trade policy is based on building industrial capacity in their domestic economy.

China is in a unique situation, since it controls the supply of its foreign currency, known as the yuan. China can set the exchange rate of yuan for dollars at any level it chooses. It is obvious with one glance at the graph of yuan-dollar exchange rates that the currency is under complete control of Chinese financial agencies. By design, China sets that exchange rate at a level that makes goods produced in China artificially cheap.

Economists argue that trade is beneficial overall, although trade creates some winners and some losers. In practice, Chinese manipulation of its currency is good for American consumers, who benefit from lower prices. At the same time, American workers suffer the loss of their jobs, as production moves from America to China. By the same token, Chinese consumers cannot afford American products, but Chinese workers benefit from sensational growth in their domestic industrial capacity.

America can address the issue of currency manipulation in several ways. In 2004, the AFL-CIO challenged China's policy under section 301(d) of the Trade Act of 1974. Unfortunately, the US Trade Representative rejected that claim. Other policy actions have focused on specific industries or products, such as tires or steel where Chinese policies distorted markets, costing jobs in America.

At various times, American officials have argued, pleaded, or lectured China about currency manipulation. China agreed to revalue its currency at least twice - once in 2005 when China ended its fixed dollar exchange rate, and recently at a G20 meeting.

Legislation in Congress today (HR 2378/S.3134) would create another tool to respond to manipulation of China's currency, by authorizing a countervailing duty. The House version has bi-partisan support, and 140 co-sponsors, including 13 from California, and Peter DeFazio from Oregon. The Senate version has 19 co-sponsors, including Senator Sam Brownback from Kansas. No one from Washington State or Utah has co-sponsored the bills.

Motion

It is moved that: THE SPEEA Council endorse a policy of supporting legislative and policy actions that prevent or discourage China from manipulating the exchange rate of its foreign currency.

PRO

· 1. Currency manipulation distorts trade patterns and hurts American workers.

· 2. So far, efforts to prevent currency manipulation have failed.

· 3. Recovery from the recession is held back as long as new jobs are not being created in America.

CON

· 1. American consumers enjoy artificially cheap goods, as long as China manipulates its currency.

· 2. China could retaliate by selling dollars, and weakening the exchange rate for dollars, which would raise prices in America.

· 3. China could withhold vital goods or services that could hurt our economy or our security.