Punishing China becomes issue for Democrats in midterm election

China’s currency manipulation is set to become a major campaign issue for Democrats in the final weeks before Election Day.

House Democratic leaders are considering legislation that would hit Chinese imports with tariffs for currency manipulation, while business groups have launched an all-out effort to stop that bill in its tracks.

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In an interview, Rep. Tim Ryan (D-Ohio), the lead sponsor of the China bill under consideration, argued his bill could be “tremendously helpful” to Democrats trying to rally their base in the fall, particularly in the Rust Belt where manufacturing jobs have been lost to China.

 “A lot of people talk about the enthusiasm gap. A lot of that is labor and union voters,” Ryan said.

Taking on China “makes sense to a lot of workers in the industrial Midwest” and will move Democratic and independent voters to the polls, he said. It will convince voters that Democrats are the party that is “going to be on your side, taking on the Chinese.”

Treasury Secretary Timothy Geithner will appear before panels in the House and Senate on Thursday to defend the administration’s diplomacy with China, which many Democrats find too weak.

No final decisions have been made, according to a leadership aide, but critics of China’s policy say interest has picked up among House Democratic leaders worried about a crushing defeat in the midterms.

Ryan and co-sponsor Rep. Tim Murphy (R-Pa.) have collected 100 signatures on a letter to House leaders urging a vote on their bill.

Separately, three dozen trade associations and business groups, including the U.S. Chamber of Commerce, the Business Roundtable, the Financial Services Forum and the Coalition of Services Industries, urged leaders of the House Ways and Means Committee in a letter Tuesday not to move forward with punitive legislation.

The letter follows an intense lobbying campaign over the August recess by the U.S.-China Business Council, which met with all but a handful of Ways and Means offices to discuss the issue, according to Erin Ennis, the group’s vice president.

The House Ways and Means Committee will open two days of hearings on China’s currency policy on Wednesday morning with testimony from Ryan.

Ryan’s bill would allow the Commerce Department to consider currency manipulation in calculating countervailing and antidumping duties on any imports from countries manipulating their currencies to lower the cost of their exports.

Democratic leaders were close to including Ryan’s legislation as part of a manufacturing push before the August break, business sources said, but held off. Now they are considering it again weeks before the election.

Many rank-and-file Democrats are frustrated with China, which promised in June to allow its currency to follow market trends. Since that announcement, China’s currency has increased by less than 1 percent.

Just a vote on currency legislation would complicate the Obama administration’s diplomacy with China, which is not only a valuable trading partner but holds trillions in U.S. currency reserves.

President Obama is set to meet Chinese Premier Wen Jiabao on the margins of a United Nations meeting next week, when he is expected to hear directly from China about the issue.

The administration has tried to hold off the Ryan measure and similar legislation in the Senate. Over the summer, White House Chief of Staff Rahm Emanuel called Sen. Charles Schumer (D-N.Y.), the leading proponent of legislation in the Senate, asking that he hold his China currency legislation back.

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Since then, Schumer has expressed frustration with the administration’s progress in winning concessions from China.

While efforts to move a currency bill have failed in the past, some believe the administration may not be able to hold the issue back this time.

“All research shows that this would be a popular move,” said Scott Paul, executive director of the Alliance for American Manufacturing. “It’s also one of the few things they can do to help the economy and jobs that doesn’t cost Treasury money.”

The U.S. trade deficit jumped more than expected in June before declining in July. The U.S. trade deficit with China stood at $25.9 billion, down from $26.2 billion in June.

U.S. manufacturers and labor groups say China keeps the value of its currency artificially low in order to lower the cost of its exports to the U.S. and other countries. This hurts American manufacturers who compete in the U.S. market against cheaper Chinese goods, and also drives up the price of U.S. exports in China.

Opponents argue legislation that would lead to tariffs on Chinese goods for currency manipulation would do more harm than good.

Rep. Peter Roskam (R-Ill.), a Ways and Means member, argued in a release Tuesday that while China’s currency manipulation is unjust, hurts U.S. economic competitiveness and costs U.S. jobs, Ryan’s bill would “inflame U.S-China relations and fail to improve the economic problems that leave U.S. businesses at a competitive disadvantage.”

In their Tuesday letter to Ways and Means Chairman Sandy Levin (D-Mich.) and ranking member Dave Camp (R-Mich.), business groups warned that China “is unlikely to proceed more quickly with currency reforms if threatened” by legislation that could lead to higher tariffs.

While both the Bush and Obama administrations have tried to stave off punitive bills on China, some suggest the Obama administration may be losing patience with the country on the issue.

In an interview last week with The Wall Street Journal, Geithner said China had made “very, very little” progress in letting its currency strengthen against the dollar. He also said he was “of course not” satisfied with China’s progress on the issue.

“China took the very important step in June of signaling that they’re going to let the exchange rate start to reflect market forces, but they’ve done very, very little — they’ve let it move very, very little — in the interim,” he said.