Trade sanctions loom as Paulson fails to get results

With nothing from talks, Congress could force issue of yuan revaluation.

US TREASURY Secretary Henry Paulson returned to Washington virtually empty-handed after last week’s economic strategic talks with China.

In two days of talks last week, China reaffirmed pledges to make its currency more flexible, while the United States said it will boost its savings rate to cut back on a trade imbalance that includes a record deficit with China.

This clearly was not good enough for US lawmakers. Mr Paulson comes home to face the wrath of a newly assertive and Democratic-controlled Congress.

The threat of sanctions and tariffs could cloud the already acrimonious bilateral trade ties. Indeed, the Democrats have fired the first salvo.

They will press the US Trade Representative’s (USTR) office to formally challenge China’s currency practices at the World Trade Organisation. The USTR had rejected this request several times before.

They will also reintroduce legislation requiring the Commerce Department to consider China’s “currency manipulation” as a subsidy under US trade laws. This will allow American companies to apply for duties to offset it.

Reflecting the fiery mood in Congress, incoming Senate Finance Committee chairman Max Baucus, a Democrat from Montana, said: “Dialogue and action must go hand-in-hand. For example, greater flexibility for China’s currency is overdue.

“Postponing further reform not only endangers our bilateral economic relationship, but also puts China’s prosperity at risk.”

Senator Charles Schumer, a New York Democrat, one of China’s fiercest critics in Congress, has scorned any suggestions that Beijing would reform.

“Every few years, with a lot of fanfare, the Chinese say they will begin a new round of serious discussions and drag the process out for a long time. At best, we end up with crumbs,” he said.

Mr Paulson had earlier managed to persuade Mr Schumer to pull back a Bill threatening tariffs on Chinese goods if Beijing does not let its yuan fluctuate.

With so little accomplished last week, it could only speed up plans to draft a new Bill to force the issue with China.

US lawmakers believe that Beijing is deliberately undervaluing its currency by 15 per cent to 40 per cent to give Chinese exporters an advantage in world trade.

If nothing was done, the trade deficit could reach a record US$240 billion (S$370 billion) this year.

With nothing to show from his trip to Beijing, Mr Paulson will have little wiggle room as the winds of protectionism and populist rhetoric blows through Congress.

With the Chinese leadership unlikely to kowtow to foreign pressure and the trade imbalance showing no signs of correction, there is every chance that the Democrats could strike with tariffs or sanctions against China.

President George W. Bush will almost certainly veto any such legislation.

For Mr Paulson, securing any concessions from China in a short time frame will be mission impossible.

The second round of the strategic economic dialogue in Washington in May next year is just as unlikely to secure any concrete results.

Ultimately, patient diplomacy with China is the only way to get Beijing on board.

But will Congress wait?