Thursday, June 10, 2010

It's Baaaaaack....

After a glorious two-month oasis of silence on China currency, the issue is back with a vengeance.  (I swear, this thing is harder to kill than the Terminator.)  Yesterday, everybody's favorite China-demagogue Sen. Chuck Schumer (D-Campaigning) announced to the US-China Economic and Security Review Commission that he and his Senate colleagues would advance legislation unilaterally attacking Chinese imports unless China appreciates its currency (the RMB) by the end of the June 26-27 G-20 Summit in Toronto.  Reuters details the comments here:
U.S. congressional anger over China's currency and trade practices boiled over on Wednesday as senators vowed to pass legislation soon and lashed out at President Barack Obama's administration for failing to get tough with Beijing.

"Years of meetings and discussions with Chinese officials in an effort to persuade China to float its currency have repeatedly failed to produce lasting and meaningful results," Senator Charles Schumer told the U.S.-China Economic and Security Review Commission, a watchdog group appointed by Congress.

"No question, this is what is called a 'put up or shut up' moment for lawmakers," the New York Democrat said.

Schumer told the commission that he and other colleagues would push for a vote "in the next two weeks" on legislation that would allow the Commerce Department to use anti-dumping and countervailing duty laws against China or any other country with a fundamentally misaligned exchange rate.

He blamed China's undervalued currency for millions of lost U.S. manufacturing jobs and thousands of closed facilities.

Getting Beijing to allow its currency to rise to a more market-oriented exchange rate would do more to create jobs in the United States than any new stimulus package, Schumer said....

Schumer and [fellow protectionist Sen. Lindsay] Graham are expected to offer their bill as an amendment to a broader piece of legislation, rather than try to pass it on its own.

For the bill to be enacted, it would also have to be approved by the House of Representatives and signed into law by Obama.
Schumer and many of his Senate colleagues - from both political parties - echoed such angry sentiments at today's Senate Finance committee hearing with Treasury Secretary Tim Geithner.  (More on that here, along with some fantastic commentary from some trade lawyer wearing way too much makeup.)  Oh, goody.

Now, I've already laid out in excruciating detail how silly and wrongheaded all of this hyper-political pabulum is from an economic, historical, legal and practical perspective, and the Senators' rhetoric remains par for the course.  Heck, I even predicted last month that those precious weeks of silence on the China currency "debate" would end right about now as these pols resumed their China attacks in preparation for the November midterm elections.  However, a few things have changed since the last time China currency was in the news (i.e., March-April of this year) which make this week's silly rhetorical flurries a little more noteworthy.

First, Greece imploded and took the Euro with it.  Back in April, pretty much everyone "in-the-know" (or at least who unwisely thinks he's i-t-k - like me) was expecting China to allow a one-off RMB appreciation of about 5% sometime right before the G-20 Summit.  Indeed, the DC tea leaves were saying that the G-20 "deadline" was the main reason that the Treasury Department delayed its semi-annual currency report.  But then the Euro collapsed and made everything a lot more complicated.  The EU, afterall, is China's top trading partner, and China is the EU's #2.  So with the Euro falling to levels not seen in years, and with the global currency markets ridiculously unstable right now because of it, the Chinese government is probably going to hold off on any RMB movement until things settle down a bit.  And you really can't blame them.

Second, China announced yesterday that its exports in May surged 48.5% year-on-year, and its trade surplus returned to pre-recession levels (a rather large $20 billion/month).  Imports into China rose by 48.3% too, but let's face it: nobody really cares about that because May's surplus statistics are definitely going to stall (or thwart entirely) any of those budding conclusions that China's tiny April surplus and March deficit signaled that the Chinese economy was finally becoming more consumption-oriented.  Now, given the EU mess, nobody really knows what's going on with China or anywhere else for that matter, but there's no doubt that China's May trade data are going to fuel the congressional currency hawks' fire.  As Patrick Chovanec eloquently put it: "by knocking the legs out from under Chinese arguments that a structural adjustment is taking place without Renminbi appreciation, China’s May export surge is likely to feed into growing US impatience over China’s hesitation in moving on the exchange rate."  Indeed.

Third, the US announced today that is April trade deficit increased 0.6% to $40.29 billion from a revised $40.05 billion in March.  From a purely economic perspective, these new data are pretty bad news: both exports and (non-oil) imports fell - a sign that US economic recovery just isn't ramping up.  But the stats are also unwelcome from a political perspective two reasons: (i) the currency hawks can scream "DEFICIT!" and most people (including a lot of bad journalists) aren't going to know that the US trade deficit's growth was driven entirely by higher energy prices; and (ii) the US trade deficit with China - which is an economically worthless, yet politically effective number - expanded significantly to $19.31 billion in April from $16.90 billion in March.  Yet another thing to point and scream about.

The combination of these three developments, a struggling US economy, and the November midterm elections is definitely going to push China's currency back to the forefront of the 2010 international trade stage and maybe, just maybe, create the perfect political storm to blow some piece of nasty currency legislation across the House or Senate finish line.  Now, I still don't expect any such legislation to ever pass both chambers and make it all the way to President Obama's desk, but I do think that we all should gird our loins for one hot, sticky (and terribly annoying) "Summer of Schumer."


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