This morning I watched a live webcast of a Senate hearing, titled, Senate Banking Subcommittee on Economic Policy to Examine Effect of China Currency Practices on American Manufacturing. The details of the hearing as well as an archive of the webcast are available at this link.
The hearing was discussing the Graham-Schumer bill that would require the government to recognize when countries are manipulating their currencies, and to then address the problem including import duties. (The bill is meant to apply political pressure on China. Every now and the Graham and Schumer introduce a similar bill, and then China responds right away by adjusting its currency. This time, however, China might not be willing to adjust enough, and the bill might well pass.)
Here are a few notes from the hearing in near-liveblogging style.
Senator Lindsay Graham had a great line in his opening statement, saying, "It’s not healthy that you have to ignore someone’s cheating to keep them as a friend." He said, "We want our relationship to be mutually beneficial.
It’s a shame we have to bring this bill." He also said, "The reason I know they’re manipulating is the only time there is a readjustment is when we put a bill in."
Panelist Clyde Prestowitz, President of the Economic Strategy Institute began by saying, "When countries manage their exchange rates that is a protectionist policy. Doing something about it is not protectionist we are already in a state where someone is being protectionist." He pointed out that China is just doing what it does to benefit their own economy, not to hurt us, and that we ought to be working to benefit our own economy, too. When asked about the recent statements by Brazil and India about China's currency manipulation, he said China’s policies are having a negative impact on many countries. Well advised to try to rally support from others. He said other countries are also manipulating currency and using various methods to attract manufacturing, including offering free land, and tax deferrals.. This distorts market dynamics.
Charles Blum, Executive Director of the Fair Currency Coalition said that if our government had acted in 2004, the damage would have been reduced. Instead us manufacturing employment is down by 1/3 since then. He pointed out that Ronald Reagan said we need, "Free and fair trade with free and fair traders, based on mutual respect for the rules." Tolerating such protectionism undermines the global economy.
Dan Ikenson, Associate Director of Cato Institute's Center for Trade Policy Studies testified that part of the problem is there is a shortage of substitutes for Chinese goods, so raising their price is a regressive tax. We don't make many of these things any more, so adjusting the currency raises the price we pay. Also, for items where they have competition China can lower prices to balance the currency shift because importing raw materials will cost them less.
Later in the hearing Ikenson said there is a myth that manufacturing has declined in US. US producers are still the world’s most prolific, by value not volume. 22% of world’s manufacturing value-add is US, while only 13-14% is Chinese, but we’re not producing consumer goods, we are producing pharmaceuticals, chemicals, etc. We have moved up the value chain, China is still at lower value-added. So we need policies that attract investment, attract human capital.
NAM says their biggest problem is our dearth of skills, people don’t have the skills here. We need to subsidize ways to get workers to get skills in exchange for workers staying at that company.
Senator Brown responded, saying it is most disturbing to him that manufacturing was a third of our GDP and finance was half of that, but today it is almost the reverse.
Derek Scissors was not on the witness list so I can't say where he is from. I will update that later. His position is that this is way beyond currency. No matter what exchange rate is China won’t import, that this is reserved for the state. China bank lending subsidizes their industries. China won’t liberalize capital controls. We should invoke WTO principals on state dominance. They have a lack of transparency, other state domination problems. Revaluation of currency won’t accomplish much because there are so many other things based on state dominance of the economy of China.