Capital Commerce: On the Hill, China looms ever larger
Expect America's massive trade deficit with China to continue stirring tension on Capitol Hill. This week, the Commerce Department reported that the deficit with China rose to $15.8 billion in May, the highest monthly figure since last November. Overall, the numbers are up 33 percent compared with the first five months of 2004, totaling $72.5 billion.
One possible legislative response is a bill sponsored by Democratic Sen. Chuck Schumer of New York and Republican Sen. Lindsey Graham of South Carolina, which threatens a 27.5 percent tariff on imports from China if the country does not revalue its currency, allowing the yuan to strengthen against the dollar.
The bill, first proposed in February, got back-burnered recently when the two senators—on the advice of Fed Chairman Alan Greenspan—agreed to put off a floor vote until autumn. But Wall Street is still jittery about the prospects. Economist Stephen Roach of Morgan Stanley thinks the move actually "ups the ante on the high-stakes China-bashing front." As he said in a new research note to clients:
If China has not changed its currency policy by October 15—a distinct possibility, in my view, especially in the context of a slowdown in the Chinese economy—then the U.S. Treasury most likely will reclassify the nation as being formally guilty of "currency manipulation." At that point, Senate passage of anti-China trade legislation will be much easier to achieve. And the world could then begin to slide quickly down the slippery slope of trade frictions and protectionism. For an unbalanced and vulnerable global economy, the economic impacts of this shock would be every bit as worrisome as another outbreak of terrorism.
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