Global
Past the Point of No Return
May 11, 2007
By Stephen S. Roach (New York)
Even the old timers in the Congress had never seen anything like it. On May 9, the US House of Representatives held what was billed as a tripartite hearing of three subcommittees on “Currency Manipulation and Its Effects on US Businesses and Workers.” I was one of the “expert witnesses” at this hearing – invited to submit a written statement and then, along with the other six members of the witness panel, to present a five-minute oral summary in front of the assembled legislators (my written statement, “A Slippery Slope,” was published as a Morgan Stanley Special Economic Study on May 9). The hearing concluded with an extensive question and answer session. It was an experience I will never forget. My worst fears were realized. At the end of over three hours of grueling give and take, I left Capitol Hill more convinced than ever that the protectionist train has left the station.
I am not exactly a neophyte at this process. Over the years, I have testified many times in front of Congress. Most of my earlier appearances took place in cavernous hearing rooms, with few in attendance other than a scattering of Senators or Representatives, along with the ever-dutiful congressional stenographer. There was even one instance several years ago when I actually testified to an empty room -- the congressmen left for a floor vote and the stenographer told me to just keep on talking. That was not the case this time. For this event, the hearing room was packed with spectators, media representatives from around the world, and members of Congress. It was Washington theater in its highest form.
The attention was understandable. I suspect this hearing could well mark a major turning point in America’s mounting resistance to trade liberalization and globalization. For starters, congressional historians offered the opinion that three committees had never before come together in one hearing to focus on a single issue. And yet in one room – the fabled hearing chamber of the all-important House Ways and Means Committee – members of three major committees having jurisdiction over matters of US international trade policy turned their attention to trade-related pressures bearing down on US middle-class workers and companies. Present were House subcommittees from Ways and Means, Energy and Commerce, and Financial Services. The very structure of this unique tripartite effort was carefully designed to send the strongest message possible. The opening comments of Sander Levin (Democrat from Michigan), who chaired this session, underscored the determination of Congress to take its long-standing concerns over US trade policy to a different level. In his words, “This is an exceptional issue and an exceptional problem that hasn’t been resolved. We need to consider the next steps. This is the real thing.”
In terms of the substance of the debate, three things surprised me about this hearing: First, while the bulk of the discussion was about China, anti-Japan sentiment was formally brought into the picture for the first time. The issue was the yen – characterized by the Congress as the world’s most undervalued major currency. While the absence of explicit intervention by Japanese authorities over the past three years was duly noted, many representatives took the position that there has been unmistakable “implicit manipulation” of the yen. Second, the case against China was framed mainly around the concept of the “illegal subsidy” – WTO-compliant jargon that frees up Congress to impose sweeping countervailing duties on Chinese exporters. Taking a cue from Federal Reserve Chairman Ben Bernanke’s mid-December 2006 speech in China, Congress seems willing to support the Hunter-Ryan bill (H.R. 782), which argues that an undervalued RMB qualifies as a subsidy that is grounds for a WTO dispute (see Bernanke’s December 15, 2006 speech, “The Chinese Economy: Progress and Challenges”). Third, the congressmen present at this hearing were highly critical of the US Treasury’s bi-annual foreign exchange review process and its failure to cite China for currency manipulation. This puts the House on a similar track as the Senate – especially that espoused by the leadership of the Senate Finance Committee, whose Chairman (Max Baucus) and ranking minority member (Charles Grassley) endorsed a similar approach last year. That is the first hint at a reconciliation strategy between the two chambers of Congress – particularly important if they are to go into a joint conference later this year after passage of their own trade bills.
Notwithstanding these new developments, the most important message is that Congress remains unwavering in its determined approach to move from rhetoric to action in 2007 on matters of trade policy. Contrary to what most believe, this is not a case of anti-trade Democrats now taking over Congress. I continue to stress that there is broad bipartisan support for anti-China “remedies.” While the Democrats are now in charge of the Congress, on matters of trade policy they have been joined by many Republicans in their crusade. There is no way, in my view, that new trade legislation will become law without the support of the GOP. That’s especially the case in the event of a veto by President Bush, whereby the math of veto-proof support would require approval by nearly half the Republicans in the Senate and about 40% of those in the House. The experts I’ve spoken with continue to assure me that such margins are well within the realm of possibility.
I didn’t go to this hearing with the naïve expectation that I would be able to change any minds. And there was no surprise on that count. There was little sympathy on the part of the Congress for linking trade deficits to domestic saving shortfalls. To the contrary, there was a broad consensus that bilateral pieces of the massive multilateral US trade deficit are fair game – in essence, an opportunity to whittle away at the US external gap one country at a time. The consensus of congressman at the hearing was that China was the problem – even though the non-Chinese piece of the overall US trade deficit slightly exceeded $600 billion in 2006, over two and a half times the size of the Chinese bilateral deficit with the US. Many congressmen were especially upset with my characterization of “China bashing.” One gentleman asked me to strike any such references from my testimony, claiming that, “We’re not China bashers. We are just trying to seek the truth.” At the same time, literally no once responded to the concerns I voiced over the unintended consequences of protectionism – namely that China bashing could backfire in the US, the rest of Asia, and the broader global economy. The bottom line here is very clear: The US Congress just doesn’t do macro.
There’s always a chance that I’m over-reacting to an escalation of Congress’s rhetorical assaults on China – that this will just be another year of bluster. Anything is possible when it comes to Washington. But I have spent more time on Capitol Hill in the past three months than at any point since I left the Fed in 1979. Since mid-February, I have testified three times on US-China trade frictions, and in each of these instances, I have seen steady progression toward a protectionist endgame. On the basis of everything I have heard over the past several months, I remain more convinced than ever that Congress has finally thrown down the gauntlet. The May 9 tripartite hearing hammered that point home with disturbing clarity. As Barney Frank, Chairman of the House Financial Services Committee, said, “This problem is not going away. We are going to have to act.” If Congress changes its mind and backs away, it fears it will lose all credibility on this key issue with American workers. With respect to China, I am afraid that means the US Congress has now gone past the point of no return.
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