Argument

An expert's point of view on a current event.

The Wrong Way to Deal with Beijing

U.S. lawmakers are moving swiftly to enact punitive tariffs on China. But American companies doing business in China believe there's a better way to rebalance the world economy.

TIM SLOAN/AFP/Getty Images
TIM SLOAN/AFP/Getty Images
TIM SLOAN/AFP/Getty Images

BEIJING--As U.S. President Barack Obama told Chinese Premier Wen Jiabao on Sept. 23, there's no question that China is holding its currency, the renminbi, artificially low, and that its recent rate of appreciation -- about 2 percent over the last several months -- is insufficient. The renminbi's value relative to the U.S. dollar needs to increase and maintain a sustained upward direction to rebalance the economic relationship over time.

Understandably, many in the U.S. Congress are outraged at the renminbi's slow rate of appreciation and have proposed legislation that would penalize China for what Sen. Charles Schumer (D-NY) recently described as "a boot to the throat of our recovery."

But the currency bill under consideration, if enacted, would do the opposite of what its proponents intend. Not only would it fail to create significant U.S. job growth, but it would also violate U.S. commitments under the World Trade Organization (WTO) and put at risk thousands of existing export-related manufacturing jobs in the United States.

BEIJING–As U.S. President Barack Obama told Chinese Premier Wen Jiabao on Sept. 23, there’s no question that China is holding its currency, the renminbi, artificially low, and that its recent rate of appreciation — about 2 percent over the last several months — is insufficient. The renminbi’s value relative to the U.S. dollar needs to increase and maintain a sustained upward direction to rebalance the economic relationship over time.

Understandably, many in the U.S. Congress are outraged at the renminbi’s slow rate of appreciation and have proposed legislation that would penalize China for what Sen. Charles Schumer (D-NY) recently described as "a boot to the throat of our recovery."

But the currency bill under consideration, if enacted, would do the opposite of what its proponents intend. Not only would it fail to create significant U.S. job growth, but it would also violate U.S. commitments under the World Trade Organization (WTO) and put at risk thousands of existing export-related manufacturing jobs in the United States.

While U.S. companies on the ground in China support a move to a market-oriented Chinese currency in general, our organization, the American Chamber of Commerce in China, which represents 1,200 companies, opposes the current legislation. We believe there’s a better way for U.S. lawmakers to create well-paying American jobs and economic growth: by coming up with a response to China’s web of industrial policies, weak intellectual property protection, and tightening market access for firms trying to do business here.

The lynchpin of the proposed legislation is new tariffs. These taxes — for that is what they are — will inevitably lead to Chinese retaliation and damage the United State’s trade and investment relationship with China. Such provisions would endanger President Obama’s ability to achieve his goal of doubling U.S. exports within five years. China is the United States’ third-largest and fastest-growing export market, and indeed the only export market that in the last five years has grown fast enough to keep pace with Obama’s target. Any gains to the U.S. economy from a stronger renminbi would be more than offset by the loss of existing manufacturing jobs caused by tit-for-tat counteractions by the Chinese.

The American business people on the ground in China know that it is not an undervalued currency that is hindering the ability of U.S. companies to export to and compete in China. In our most recent Business Climate Survey, respondents did not list currency valuation as among their top 10 concerns. In other words, there are at least 10 issues more important to improving the competitiveness of U.S. companies in China than currency appreciation. China’s growing web of industrial policies, for instance, is a far greater obstacle to American economic success.

Take China’s "indigenous innovation" policies, which are aimed at fostering national champions and promoting Chinese innovation. In practice, these involve limiting foreign products and access to technology. To cite just one example, China’s "Guiding Catalogues of Major Indigenous Innovation Technologies and Equipment of 2009" specifically cites replacing imports with Chinese products as a goal. A variety of regulations attempting to tilt the playing field toward Chinese companies exists in the telecom and renewable-energy sectors.

Or consider China’s poor protection of intellectual property, another hurdle for American companies trying to do business here. Not only are software and DVDs routinely and openly pirated, but the problem now extends into areas as diverse as pharmaceutical products, automotive parts, and consumer electronics. The cumulative loss to U.S. companies runs into the tens of billions of U.S. dollars, with an impact on jobs to match.

Beijing is also moving too slowly in reaching its commitment to join the WTO’s Government Procurement Agreement, which would open up China’s domestic market to fairer competition. China promised to do so as "soon as possible" when it joined the WTO. That was a decade ago. China’s rapid accession, on terms comparable to those of other countries that have joined, would open new opportunities for U.S. exports and products made by U.S.-invested subsidiaries in China.

Beyond these obvious priorities in the bilateral relationship, the currency bill would not have the effect on the U.S.-China trade deficit that lawmakers hope. Other issues, including the euro and yen exchange rates, affect the U.S.-China trade deficit far more than the renminbi rate does. From 2005 to 2008, when the Chinese currency appreciated 18 percent against the dollar, the bilateral trade deficit increased dramatically. Conversely, when the renminbi was fixed against the dollar during the recession, the trade deficit shrank. Moreover, the renminbi’s appreciation is more likely to shift jobs in the lowest-margin industries to other low-cost countries than it is to create new high-paying manufacturing jobs in Middle America.

Furthermore, the punitive tariffs in the proposed legislation would also violate the United State’s WTO commitments. In the meantime, the global trading system, which was painstakingly constructed under U.S. leadership over decades, would be dramatically weakened.

During his recent testimony on Capitol Hill, Treasury Secretary Timothy Geithner said that pursuing policies that make manufacturing stronger in the United States is the right course of action. We support this direction, but the bill before Congress is not the way to accomplish this goal.

John D. Watkins Jr. is the chairman, and Christian Murck is the president, of the American Chamber of Commerce in China.

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