http://www.familysecuritymatters.org/publications/id.7527/pub_detail.asp
October 1, 2010 House Acts Against Two Chinese Threats <http://www.familysecuritymatters.org/authors/id.89/author_detail.asp> William R. Hawkins Print This <javascript:%20printVersion()> E-mail This <javascript:%20emailVersion()> <javascript:void(0);> http://www.familysecuritymatters.org/images/share.png ShareThis <javascript:void(0);> Comments <http://www.familysecuritymatters.org/publications/comments.asp?id=7527> (1) http://www.familysecuritymatters.org/imgLib/20100930_ChinaFlag.jpgOn September 29, a large, bi-partisan majority in the U.S. House of Representatives approved two bills indicating that Congress has finally woken up to the threat the People's Republic of China (PRC) poses to the prosperity and security of America. The first piece of legislation was the Currency Reform for Fair Trade Act (H.R. 2378), which had been pending for several years. The bill is rather modest in its approach to a major issue. China's exchange rate is not set by the market but by government fiat to gain a competitive advantage in trade. The Chinese yuan is undervalued by as much as 40 percent, making exports cheaper and imports more expensive. The bill asks the Commerce Department to define currency manipulation as an illegal export subsidy under U.S. law and consistent with World Trade Organization rules. American firms could file a suit with the Commerce Department if they felt they were being harmed by this practice. If they can prove their case, countervailing duties could be applied to Chinese goods entering the U.S. market to offset Beijing's policy. The second piece of legislation, voted on immediately after the first, was the Rare Earths and Critical Materials Revitalization Act of 2010 (H.R. 6160) which had only been introduced on Sept. 22. It was a quick response to China's threat to halt the export of rare earth metals to Japan as tensions mounted over the disputed island chain known as the Diaoyu in Chinese and the Senkaku in Japanese. Beijing's threat sent shockwaves around the world. Rare earth metals are vital for high-tech products such as hybrid cars, wind turbines, computers, and aircraft. China accounts for 97 percent of world output, having gained a monopoly by underselling rivals in the U.S. and Australia to drive them out of business. American mines were further disadvantaged by environmental regulations that led to the closing of the last mine in 2002. China has been reducing rare earths exports since 2006 in order to supply its domestic industries, a policy that has also been used to lure foreign manufacturers to relocate to China to have access to the resources. The Government Accountability Office warned in April of "vulnerabilities" for the U.S. military because of the lack of domestic rare-earth supplies. The use of rare earths in the production of precision guided weapons was a particular concern. H.R. 6160 sets up and funds a program of research and development aimed at rare earth manufacturing and recycling, and also broadens an existing program of loan guarantees to facilitate these new technologies by private industry. As Rep. Bart Gordon (D-TN), chair of the House Science and Technology Committee which voted the bill to the floor the day after it was introduced, stated, "I believe it would be foolish to stake our national defense and economic security on China's goodwill." His sentiment has much wider applicability, as Beijing spent the summer stirring up confrontations all along the Pacific Rim and conducting provocative military exercises. The currency bill was passed 348-79 and the rare earths bill by 324-92. These are impressive tallies in a Congress that has too often been marked by a partisanship that has pushed national interests to the side. Yet, given the issues at stake, one has to wonder why the majorities were not even larger. The arguments of the opponents are of interest because their fundamental flaws can affect a wide range of other issues. Very few Congressmen spoke against the currency bill, and they did not base their opposition on the principle of "free trade." This academic sophistry has little relevance anywhere, but certainly means nothing when applied to a communist regime whose economy, despite capitalist trappings, is still dominated by state-owned enterprises and five year plans. Instead, dissenting lawmakers cited letters from various business groups who feared getting tough with their Chinese partners would cost them money. It was a dishonorable display of special interest pandering at its worst. In a 2003 interview with Bloomberg news, James Sasser, who served as ambassador to China during the Clinton administration, stated, "The Chinese really don't do any lobbying. The heavy lifting is done by the American business community." Or at least by those firms who think they can profit from helping China rise regardless of the broader consequences. When the U.S.-China Business Council or the National Retail Federation oppose measures against Chinese imports, their special interest is clear to see. But the same holds true for the Business Roundtable, the National Council for Foreign Trade, and the Chamber of Commerce, all of whom are dominated by major transnational corporations who no longer think in national terms. They have all invested heavily in China and feel that their future depends on the U.S. holding to an appeasement policy towards Beijing. All admitted that Beijing manipulates its currency unfairly, but the solution these groups advocated was continued "dialogue" or "engagement" or "negotiations" with Beijing rather than the taking of any action. As the US-China Business Council argued, "The Obama administration's multilateral and bilateral approach should be supported and continued, not undermined." This is simply an echo of Beijing's party line. China knows that as long as talk is used as a substitute for action, it does not have to change its policy. It is the same strategy Beijing has used in the Six Party Talks over North Korea's nuclear program and the UN P5 + 1 talks over Iran's nuclear program. For appeasers, the U.S. should only talk while letting others act. The United States has been trying to negotiate a solution to the currency issue since 2004 in a wide variety of venues and countless meetings. In early September, White House economic advisor Lawrence Summers made another futile trip to Beijing and returned empty-handed. And President Obama did no better talking directly to Chinese Premier Wen Jaibao at the UN. The only way to strengthen the hand of American diplomats is to back their words with action. The business groups know the failed history of negotiations with Beijing. They are not sincere in proposing more talks as a solution. They do not want a solution because they are in bed with Beijing. What carried the day in the debate was the slow pace of the "jobless recovery." According to the Commerce Department, the trade deficit lowered second quarter GDP growth by 3.4 percent on an annualized basis. The trade deficit is the largest negative factor in the GDP equation. China is the largest bilateral trade deficit, fostered in part by currency manipulation. It is estimated that over a million jobs have been lost to China due to its predatory trade policies. The currency bill allows firms that have been harmed by Beijing's policies to seek redress and protection from future injury. This is a proper role for government, just as it is proper for the government to support strategic industries like rare earth mining. International trade affects the balance of power in the world by shifting capital, technology and production across borders. Governments must monitor and manage these flows to protect their national communities. The House votes are a start, though much more needs to be done to protect American prosperity and security in a dangerous world. <http://www.fsmarchives.org/> FamilySecurityMatters.org Contributing Editor <http://www.familysecuritymatters.org/authors/id.89/author_detail.asp> William R. Hawkins is a consultant specializing in international economic and national security issues. He is a former economics professor and Republican Congressional staff member. 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