The U.S.

House to vote on Chinas currency Teaser: The United States administration is not yet ready to shift its overall strategy to get China to speed up currency reform. Summary: The U.S. House Ways and Means Committee on Sept. 24 met to mark up the Currency Reform for air Trade !ct" a proposed #i$$ that %ou$d force the U.S. Commerce &epartment to treat China's under(a$ued yuan as a )su#sidy) for its e*ports. The #i$$ is more $ike$y an attempt to garner (otes for candidates facing c$ose races in +o(em#er than a real move against China, since it is unlikely to be approved in the Senate. The United States cou$d mo(e more aggressi(e$y against China on the issue" #ut Washington does not appear ready to shift its overall strategy yet. !na$ysis: The U.S. House Ways and Means Committee met Sept. 24 to mark up the Currency Reform for air Trade !ct" a #i$$ proposed in the House of Representati(es that %ou$d force the U.S. Commerce &epartment http:,,%%%.stratfor.com,ana$ysis,2-.--42/0us0currency0pressure0increases1fn234.5-3444/ to treat China's under(a$ued currency as a )su#sidy) for its e*ports and reta$iate according$y. The purpose of the markup is to make the #i$$ comp$iant %ith Wor$d Trade 6rgani7ation 8WT69 ru$es" as other%ise its $ega$ity and sur(i(a$ are in dou#t. The Committee approved the bill and it allegedly %i$$ #e put to a (ote in the House ne*t %eek. The yuan issue has dragged on for years" #ut has intensified in the past .2 months http:,,%%%.stratfor.com,geopo$itica$0diary,2-.--//-0chinas0currency0de#ate #ecause of economic difficu$ties in the United States after the g$o#a$ economic crisis and the po$itica$ atmosphere ahead of the midterm e$ections. The issue has heated up noticea#$y in recent %eeks after hearings in the U.S. House and Senate o(er proposed #i$$s that %ou$d force the administration to take stronger puniti(e measures against China than it 8or its predecessor9 has #een %i$$ing to. China announced more f$e*i#i$ity to its currency p$an in :une http:,,%%%.stratfor.com,geopo$itica$0diary,2-.--;240chinas0currency0mo(es0and0us0e*pectat ions" #ut since then its currency has appreciated on$y ..5 percent" %hich top U.S. officia$s ha(e said is not far enough or fast enough to demonstrate a genuine effort to make a su#stanti(e change. !s for the proposed #i$$ in the House" e(en if it passes a (ote" there is $itt$e chance that the Senate %i$$ (ote on or appro(e a reconci$ed #i$$ #y the end of the $egis$ati(e session in the first %eek of 6cto#er. The #i$$ pro#a#$y %ou$d not he$p any senators in the midterm e$ections. There are" ho%e(er" se(era$ representati(es in (ery c$ose races in their districts %ho cou$d #enefit from passing a $a% against China's currency << po$$s indicate that most $ike$y around .-" #ut possi#$y up to .5 out of near$y 4- seats cou$d go either %ay #et%een Repu#$icans and &emocrats. A further five or so could be snatched from Republican-leaning districts. Sti$$" the #i$$ %ou$d

#ring %ith it a num#er of contro(ersies and %ou$d #e cha$$enged #y China at the WT6. Therefore" at this point the #i$$ in the House is most $ike$y" as has %ide$y #een suspected" an attempt to garner (otes for the candidates facing c$ose races rather than a promising #id to enact puniti(e measures against China immediate$y. =ut this does not mean the U.S. administration is satisfied %ith the status >uo << domestic economic and po$itica$ conditions for#id that. !nd acti(ity seems to #e picking up. U.S. Treasury Secretary Timothy ?eithner had a te$ephone con(ersation %ith China's @ice Aremier Wang Bishan" his counterpart" this %eek" and Chinese Aremier Wen :ia#ao met %ith U.S. Aresident =arack 6#ama on the side$ines of the U.+. ?enera$ !ssem#$y meeting in +e% Cork on Sept. 2/. 6#ama said that %hi$e there %ere many good points in the re$ationship" cha$$enges in the economic sphere remained" and the +ationa$ Security Counci$'s !sia specia$ist :effrey =ader $ater said currency %as the primary topic discussed. Mean%hi$e" Wen reiterated the Chinese position that its e*change rate is not the cause of its persistent $arge trade surp$uses %ith the United States" and %arned that a fast and dramatic appreciation of the yuan such as 2-<4percent" %hich Washington has demanded" %ou$d desta#i$i7e China's economy and cause %idespread socia$ uphea(a$. These c$aims cannot #e easi$y dismissed" since a stronger currency %ou$d %eaken the attracti(eness of China's e*ports at a time %hen the $a#or<intensi(e e*port sector a$ready faces unsteady e*terna$ demand 8though of course a strong currency %ou$d #enefit these firms in terms of their imports9. &i(erting attention a%ay from the currency issue" Wen has a$so stressed that China is %i$$ing to increase imports of !merican goods" open up more sectors for U.S. in(estment and secure a sta#$e en(ironment for U.S. companies in China. !fter these meetings %ith Chinese officia$s" the 6#ama administration has sent se(era$ signa$s suggesting it %i$$ gi(e China a $itt$e more time to demonstrate its %i$$ingness to $et the yuan rise" as it has done during pre(ious periods of heightened rhetoric on this issue. Ho%e(er" it has a$so sent strong signa$s in recent days http:,,%%%.stratfor.com,ana$ysis,2-.--4.;0us0and0china0#uy0more0time0yuan0contro(ersy that it is genuine$y ready to increase pressure on China if the coming %eeks do not sho% more progress on the yuan's rise than the rise of $ess than 2 percent since :une" %hen China dec$ared it %ou$d change po$icies to a(oid pressure from Washington. The >uestion is ho% much more asserti(e the United States %i$$ get. With high unemp$oyment and se(era$ &emocratic candidates in trou#$e" the administration cou$d #enefit #y f$e*ing its musc$es. Df the resu$t stirred up China and pro(oked more harsh %ords across the Aacific" so much the #etter for &emocratic candidates %ho cou$d then present themse$(es as defending their country. Cet %hether this cou$d inspire the United States to make a decisi(e shift in its o(era$$ strategy is dou#tfu$. STR!T 6R sources in Washington tend to think the United States has not yet reached a #reaking point" and is %i$$ing to continue gradua$$y increasing the pressure in negotiations and using the too$s a$ready a(ai$a#$e to pursue its purpose. These too$s inc$ude continuing %ith negotiations 8for instance" the upcoming ?<2- meeting in +o(em#er" or the p$anned (isit #y Chinese Aresident Hu :intao in :anuary9" imposing more counter(ai$ing and anti< dumping duties on specific Chinese goods here and there" and encouraging other states to pressure China on its currency. =ut the administration cou$d a$so use too$s it has so far on$y a$$uded to" such as naming China a

currency manipu$ator in the U.S. Treasury report due in 6cto#er or petitioning the WT6 to assess China's currency. The currency manipu$ation charge %ou$d #e po$itica$$y e*p$osi(e in China" #ut %ou$d rea$$y on$y re>uire a ne% round of #i$atera$ ta$ks to #e initiated. !nd any WT6 case" especia$$y one %ith fe% precedents and uncertain app$ica#i$ity" %ou$d take years to adEudicate. he administrations hesitation to shift its overall strategy and take aggressi(e uni$atera$ action << such as imposing s%eeping trade #arriers and demanding thoroughgoing reform from China << is genera$$y fe$t to #e connected to the possi#$e negati(e repercussions. irst" %hi$e tota$ currency reform %ou$d affect the trade #a$ance" it cou$d a$so cause unforeseen conse>uences or market reactions that cou$d negati(e$y redound on the &emocrats. Moreo(er" though genuine reform %ou$d go some %ay to%ard reshaping China's economic system" the socia$ sta#i$ity threat is genuine" and serious disruptions there %ou$d not on$y deep$y affect U.S. gro%th #ut a$so the g$o#a$ economy. The U.S. administration genera$$y has fo$$o%ed a po$icy of attempting not to pro(oke China" since =eiEing %ou$d reta$iate not on$y through trade #arriers of its o%n #ut a$so through p$acing increasing #urdens on U.S. companies operating in China. This %ou$d not on$y hurt those companies 8hence their resistance to such po$icies in the United States e(en #efore they take shape9 #ut cou$d $ead to a do%n%ard trend or trade %ar. Moreo(er" Washington is sti$$ seeking Chinese cooperation on strategic matters inc$uding Dran" !fghanistan" Aakistan and +orth Forea. G(en though these efforts ha(e yie$ded de#ata#$e #enefits" the administration is deep$y concerned %ith these foreign po$icy areas and re$uctant to take on another #ig set of pro#$ems in yet another region. Whi$e the United States does not seem disposed to change strategies immediate$y and use sudden and aggressi(e ne% means to change China's #eha(ior" it can #e e*pected to do Eust that e(entua$$y http:,,%%%.stratfor.com,%eek$y,2-.--/240china0crunch0time . Washington forced its o%n a$$ies" such as :apan" ?ermany and South Forea" to conform to internationa$ currency ru$es %hen their economies reached a point of de(e$opment at %hich they %ere percei(ed to #e competing unfair$y %ith the United States. The re$ationship %ith =eiEing is far more trou#$esome" #ut there is $itt$e reason to think Washington %i$$ not e(entua$$y decide to insist on China's adherence to internationa$ e*change rate norms. =ut the time for a sharp change in direction does not seem to ha(e come. Washington sti$$ seems inc$ined to%ard using its e*isting strategy to urge China to >uicken the pace of a reform that =eiEing is pursuing e*treme$y gradua$$y for its o%n reasons.