Veto Proof Insanity

Four senators expect overwhelming approval of bill to pressure China to revalue its currency more quickly. A tough China yuan law is coming.

Four senators said they expected Congress quickly and overwhelmingly to approve a bill they introduced on Wednesday giving the Treasury Department new tools to press China to raise the value of its currency at a brisker pace.

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, told reporters he expected to begin committee action on the legislation before the August congressional break, with an eye toward full Senate debate by September.

Sen. Charles Schumer, a New York Democrat, predicted the legislation would pass both the Senate and the House by a two-thirds "veto-proof" vote capable of overriding any presidential veto.

Sen. Lindsey Graham, a South Carolina Republican, urged the Bush administration to embrace the legislation and work with senators to win its approval.

New Tools

Congress wants to give the treasury new tools? But the Treasury does not want tools and even goes on to state China is not a currency manipulator.

The Bush administration yesterday refused to cite China as a country that manipulates its currency to gain unfair trade advantages.

American manufacturers contend that China is undervaluing its currency by as much as 40 percent. That has been a boon for American consumers, providing them with cheaper-priced Chinese imports, but it has driven the US-China trade gap to an all-time high of US$232.6 billion, one-third of America's record deficit of US$758.5 billion last year, The Associated Press reported.

But the administration, in its semi-annual currency report, said that China did not meet the technical requirements of a country that is manipulating its currency to gain trade advantages.

The Treasury Department said while it was obvious that the Chinese government was controlling the value of its currency against the dollar, it could not determine that this action was being done for the purpose of "gaining unfair competitive advantage in international trade." That is the standard set in the law.

Bipartisan Support For Action

Hmmm. Since when did anyone in this administration care about the law? That is a striking new development. Congress does not like it one bit either as judging from the developing bipartisan support to force Paulson's hand.

• Senators Richard Shelby of Alabama and Christopher Dodd of Connecticut want to change the law to make it easier to declare manipulation.
• Charles Schumer of New York and three others introduced separate legislation to allow companies to petition for steeper import tariffs to counter undervalued currencies.
• "China is a notorious currency manipulator," Shelby said in an interview today. "We have to get real with the Chinese. The Treasury needs to wake up."
• Illinois Senator Barack Obama, a Democratic presidential candidate, asked Paulson in a letter to reverse the decision, and pledged to back his colleagues' efforts to take a harder line on China.
• Michigan Representative Sander Levin, the Democratic chairman of the House Ways and Means Committee's trade panel, promised a "prompt" legislative response of his own.
• Iowa Senator Charles Grassley, a Republican co-sponsor of the proposal [Schumer's bill], said in an interview their intent was to "take a velvet glove and put a steel fist in it."

So whether or not the Treasury department wants new tools or not, Congress is marching on.

Misaligned Currencies

It's time to drop focus on the words currency manipulator and instead focus on the words misaligned currencies as Congress unveils a bill to combat the yuan.

1) The bill would require Treasury to develop a new semiannual report to determine whether a country's currency is "fundamentally misaligned," regardless of intent.

[Mish comment: Exactly how is anyone going to determine "fundamental alignment"?A better question might be: how much is this going to cost?]

2) For nations labeled as a priority country, the legislation would require the Treasury to seek immediate advice from the International Monetary Fund and key trading partners on how best to address the issue.

[Mish Comment: Requiring the Treasury (or anyone) to seek advice from the IMF is simply too funny. Who in their right mind wants advice from the IMF? Besides, if the IMF had advice wouldn't they already be handing it out? As for consulting key trading partners.... Hmmm Like China? For that matter exactly what would Canada have to say? Finally... If anyone offered advice would we even take it?]

3) The bill requires the Treasury to oppose any favorable change in IMF governance practices for a targeted country and orders the Commerce Department to take the targeted country's currency practices into consideration when deciding if it qualifies as a "market economy" under U.S. anti-dumping laws.

[Mish comment: Lovely. So now we've got the commerce department and the IMF involved too.]

4) After six months, the bill ratchets up the pressure on countries with misaligned currencies by imposing additional penalties. Those include allowing U.S. companies to seek anti-dumping duties against the country's currency practices, something they cannot do now.

[Mish comment: Let's pay manufacturers to produce nothing while jacking up costs on the average US citizen. This will get the economy humming.]

5) If the country has not reformed its currency practices after a year, the U.S. Trade Representative's office would be required to initiate a currency case at the WTO.

[Mish comment: And what will that do?]

6) The Treasury Department also would be required to consult with the Federal Reserve and other central banks on possible "remedial intervention in currency markets" against the targeted country.

[Mish comment: The RMB is pegged to the dollar, so we sell dollars and buy currency that is pegged to the dollar. Is this going to work? Does anyone in Congress understand that Japan tried to destroy its currency for years and failed? The YEN collapsed as soon as Japan stopped trying to force it down.]

Who's Involved in this Bill?

• Congressional Oversight Committees
  
• Commerce Department
• World Trade Organization
• Fed
• Key Trading Partners
• International Monetary Fund
• Central Banks
• U.S. corporations harmed by misalignment

Good grief! That's a lot of involvement given that Paulson said the Treasury has all the tools it needs to press China on the currency reform. And it doesn't even include Rob Portman, Bush's Trade Czar. Isn't this a trade issue as well as a currency issue? Portman seems to have vanished off the end of the earth. What's he doing? Does anyone know? A Google search on this guy turns up next to nothing.

This bill is going to create all this new involvement without even getting involved someone specifically appointed to look into trade issues. Amazing! Won't tariffs or import duties affect importers? Dock workers? Truckers? Speaking of which aren't we overlooking all of the jobs that were created because of cheap funding from China? (See Living Wages & The Protectionist Train). About the only idiocy missing from the bill is the creation of a new currency czar. Obviously that was an oversight in otherwise near perfect insanity.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/