The Case for a Sound Dollar
The Coalition for a Sound Dollar is fighting for the fair valuation of the U.S. dollar with foreign currencies, particularly the Chinese yuan.
By Karen M. Koenig
The Coalition is comprised of more than 90 U.S. trade associations including the American Furniture Manufacturers Assn., Architectural Woodwork Institute, Wood Component Manufacturers Assn. and the Wood Machinery Manufacturers of America. Among its claims is that, by pegging currency to the U.S. dollar and thereby making its exports cheaper, China has played a major role in the decline of the U.S. economy.
Between January and September 2003, China's furniture exports to the United States totaled more than $5.6 billion, making it the number one source, according to data by the U.S. Department of Commerce. China is also the leading exporter of wood household furniture to the United States, with $2.6 billion shipped during the first three quarters of 2003. Chinese-manufactured bedroom furniture, which is included in this category, has been targeted for alleged antidumping violations.
Wood & Wood Products talked to Patricia Mears, director, International Commercial Affairs for National Association of Manufacturers and executive director of the Coalition for a Sound Dollar, regarding their efforts to level the monetary playing field.
When and why was the Coalition for a Sound Dollar founded and what is its mission?
Originally the Coalition focused on U.S. government "strong dollar" policy, pointing out to the Treasury Department the damage this policy was doing to U.S. manufacturers. As the dollar, beginning in February 2002, began to move to more realistic levels, the lack of movement against a number of key Asian currencies "stuck out like a sore thumb" because their governments used various practices, most notably massive interventions in currency markets and accumulations in their foreign currency reserves in order to keep their currencies below market levels to gain advantage for their exports.
The four countries that the Coalition focused on were China, Japan, South. Korea and Taiwan. These four countries collectively hold over $1.3 trillion in their foreign currency reserve accounts - over half of the total world reserves; and these countries account for 60% of the total U.S. trade deficit in manufactured goods.
China has been grabbing headlines recently for failing to unpeg the yuan from the U.S. dollar. Is China the main country the Coalition is concerned about?
The Coalition has focused on the four countries stated above. However, as the Coalition began looking for some tangible action that could be taken to give "teeth" to our government's discussions with these countries, Section 301 of the 1974 Trade Act seemed to be the best option. Since individual cases would have to be prepared for each country, and these cases are costly, the decision was made to form the Fair Currency Alliance of those associations that had a primary interest in filing a case against China. Funds have been raised and the Alliance this month is in the final stages of engaging a law firm to prepare the case.
The wood products industry is among those accusing China of manipulating its currency by not floating the yuan. This is not a new practice for China; it has in fact been doing this since 1994. Why is this just now garnering the general media's attention?
For two reasons: One, the work of the Coalition and Fair Currency Alliance has been instrumental in bringing this issue to the forefront. Second, the significant increase in our trade deficit with China and the growing problem that trade with China is becoming for many U.S. companies have caused there to be greater attention paid to what are the issues involved in our trading relationship.
In its annual report on exchange rate policies, the U.S. Department of Treasury said that no U.S. trading partners are engaging in currency manipulation and therefore will not be cited under provisions of the Trade Act of 1988. Yet, despite the Department's finding, U.S. Treasury Secretary John Snow has said he will continue to pressure Asian countries to allow the value of their currencies to be determined by the international marketplace. What is the Coalition's response to the Treasury Department's findings?
We are very disappointed with the Department's findings and have requested a meeting with Treasury officials on this and are working with various members of Congress to change the language of the Trade Act provisions in order to clarify the definitions and the intent of Congress in requesting this report. Having said this, it is also important to point out that the Coalition and Alliance have been very pleased in general with the attention and priority that Treasury Secretary Snow has given to this issue in his bilateral discussions with foreign leaders and in multilateral discussions with the G-7 finance ministers.
Can you cite some examples that support the claims of currency manipulation?
The most significant factor in the issue of currency manipulation is the accumulation of massive foreign currency reserves by the Chinese. It indicates the degree to which the Chinese government is having to take action to counter what market forces would otherwise do to increase the value of the yuan.
The International Monetary Fund, the Bank for International Settlements and a number of economists have indicated that these accumulations are exceptional and are having an adverse effect on global adjustments. In fact, this accumulation is not good for the Chinese economy internally, as the domestic money supply increased over 20% in 2003, causing overheating and the potential for inflation and an asset bubble in China.
In addition to issuing press releases, what other steps does the Coalition plan to take to support Secretary Snow in his efforts?
We do a great deal of education and lobbying on this issue in Congress. We have worked with members of Congress on letters to President Bush from members, testified at hearings on Chinese currency, and as noted above, are working on language that will permit Congress to get the kind of acknowledgment and analysis of the currency situation that is required from the Treasury Department.
China's alleged role in currency manipulation has been a particular target of Congress. A resolution by Sen. Lindsey Graham (R-SC) demanding that China re-examine its monetary policy passed last month, while a similar measure is underway in the House. Legislation to levy import tariffs on Chinese goods also may soon be passed if China does not let its currency freely rise.
Does the Coalition for a Sound Dollar support these measures? Why or why not?
As previously noted, the Fair Currency Alliance has worked with Congress on these initiatives. The Alliance is divided in its support for legislation levying import tariffs. A number of the most hard-hit industries support such legislation and others do not, citing the fact that such unilateral imposition of across-the-board tariffs is inconsistent with our WTO obligations and would make it difficult for us to ask China to live up to its international agreements.
What more do you feel needs to be done by Washington officials?
The Fair Currency Alliance is in the process of hiring a legal firm to prepare a 301 Trade Case against the Chinese for its currency practices. This case must be presented to and accepted by the (Bush) Administration, which will then have 12 to 18 months to find a solution. We feel that the Administration should take this case as it represents the kind of leverage the United States needs in negotiations with the Chinese government to reform its currency practices.
What is the level of urgency in getting this issue resolved and what is a reasonable timeframe for doing so? What impact will it have on the future of woodworking - and on all of manufacturing - in the United States if it is not resolved quickly?
The issue of monetary policy is a very complicated one and the Chinese banking and capital system is weak and in need of significant reform. Many have said that China cannot afford to float its currency until those reforms are at least partially completed. The world-renowned Institute for International Economics, located in Washington, DC, undertook a study of this problem and came up with a possible solution: The yuan should be revalued by approximately 25%, a number chosen to come close to what its estimated market value could be - the estimates range from 15% to 40%, with many in the range of 20% to 25%. It should then be re-pegged to a "basket" of currencies that would not only include the dollar, but also currencies such as the euro, thus taking some of the pressure off the dollar. As Chinese reforms come onstream, the band that the yuan is pegged to can be widened gradually, and finally move to a free float.
This initial step could be accomplished in a relatively short period of time, say within six months. This would make a significant difference in our trade deficit with China and allow U.S. manufacturers to be more competitive against Chinese products both here in the United States and in the fastest-growing import market in the world, China. We understand that a revaluation is not going to translate one-for-one into the price of goods. For example, if the Chinese revalue the yuan by 25%, not all Chinese goods are going to be 25% more expensive, because part of the cost of many goods is non-yuan cost, such as shipping and imported inputs. But with labor and associated costs only being on average 11% of the cost of a U.S. manufactured good, this kind of realignment could make a significant difference in competitiveness to a wide range of U.S. companies.
Although not a part of the mission of the Sound Dollar Coalition or Fair Currency Alliance, it is important in any discussion of China to note that it is important that we press on other fronts as well. There should be a close look taken at possible subsidization of Chinese industries, as well as pressing them to fulfill their WTO commitments fully, including IPR protection and cracking down on counterfeit products. In addition, our government should be doing more to assist U.S. companies in exporting, especially to China where we only account for 10% of its $330 billion - and growing - import market. For example, in 2002, the European Union exported 40% more to China than the United States did.
For more information on the Coalition, visit www.sounddollar.org.
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