A
lthough US and Chinese trade officials have held two high-level negotiating sessions in
the past six months, little progress has been made on resolving a number of thorny issues. When the
two groups met in Washington this past May, the Chinese came to town complaining about US
protectionist policies, and US government officials and manufacturers complained about the
burgeoning trade deficit. Returning home after two days of meetings, the Chinese delegation still
was complaining about protectionist trade policies and US interests still were complaining about
the trade deficit.

After much rhetoric about agreement on fundamental principles, very little of a specific
nature came out of the meetings. Any meaningful resolution likely will be the result of
congressional concern over the trade deficit and its impact on US jobs.

A primary target is what many in Congress and the business community say is China’s alleged
illegal currency manipulation. They contend China’s refusal to let its currency float amounts to as
much as a 40-percent subsidy for Chinese exports entering the US market. Legislation has been
introduced in the House and Senate that would declare currency manipulation an unfair trade
practice and permit US manufacturers to seek relief under anti-subsidy countervailing duty laws
that could be applied to both market and non-market economies. The legislation enjoys the strong
support of textile manufacturers and other members of the China Currency Coalition, but it is
strongly opposed by retailers and other importers, who contend the legislation would result in
higher prices for consumer goods and would do nothing to save US jobs.

Fuel was added to the fire in June when the Department of the Treasury, in its semiannual
review of foreign currencies, declined to brand China a currency manipulator. The department said
that while Chinese currency is clearly undervalued, it does not meet the technical requirement that
it is being used as a means for gaining unfair competitive advantage in international trade. The
Bush administration, and particularly Treasury Secretary Henry M. Paulson Jr., are continuing to
support a go-slow policy that relies on negotiation rather than punitive tariffs or other measures.
Members of the House and Senate have introduced legislation to address the currency manipulation
issue, but it faces a difficult road in view of strong opposition from the president and consumer
groups. Its greatest strength is as a means to bring pressure on the Bush administration and China.
The international currency report said Treasury “forcefully raises the Chinese exchange rate regime
with Chinese officials at every available opportunity and it will continue to do so.” It also said
Treasury should not hesitate any longer to take “far more aggressive action to rebalance its
economy and achieve far greater flexibility with its exchange rate.

An area that could yield specific results with China relates to the Department of Commerce’s
recent decision to apply countervailing duty laws to nonmarket economies such as China and Vietnam.
While the initial case in this area involves coated paper products, the department’s leading trade
officials have said it could be applied to other industries. That has sent a signal to the US
textile industry, which is looking into opportunities to file countervailing duty cases following
the precedent set in the paper case.

Congress is looking into areas other than currency manipulation to attack trade problems. The
Senate Finance Committee is considering legislation that would strengthen anti-dumping and
countervailing duty laws. In launching the hearings on possible changes in trade remedy laws,
Finance Committee Chairman Max Baucus, D-Mont., said the United States must do all it can to
enforce trade remedy laws at home, but at the present time “we are falling behind.” He raised the
question of whether existing laws are adequate and if agencies such as the office of the US Trade
Representative have enough staffers, and if they have the capacity and tools to deal with
modern-day trade issues. “We need to back up our trade enforcement purposes with action,” Baucus
said.

At a hearing on Trade Enforcement for the 21st Century Economy legislation, Jennifer A.
Hillman — a highly respected former commissioner of the US International Trade Commission and
general counsel for the chief US textile negotiator — raised questions about existing trade
enforcement practices.

“The central question with respect to imports is whether we are making it possible for those
who are entitled to relief under our trade remedy laws to obtain that relief in a timely, effective
manner and at a reasonable cost,”Hillman said, concluding that for now the answer is “yes,” but she
expressed concerns about problems in the future.

She said both sides of the trade issue — enforcement of trade remedies against unfairly
traded imports, and enforcement of rights for access to foreign markets and the protection of
intellectual property rights — “are facing major challenges.”

Appearing at the same Senate hearing, Eric Autor, the National Retail Federation’s vice
president and trade counsel, warned the proposed trade remedy law would “lead to more
protectionism.” He said there is no need to strengthen current laws to make it easier for
petitioning industries to obtain relief, and he added that US trade remedy laws are already “
vigorously and even zealously enforced.”

“Waving the banner of fair trade, some domestic industries have taken advantage of popular
anxiety over trade and globalization to push for protectionist measures and legislation to limit
foreign competition and pad their own profit margins at the expense of US consumers,” he added.

Another bill gaining support is the Border Tax Equity Act of 2007, which would provide US
exporters with relief from value-added taxes (VAT) that some 150 countries impose on US exports
entering their countries and grant a tax rebate for their exports. Introduced by a bipartisan group
of House members, the border tax bill was quickly endorsed by textile and apparel lobbyists in
Washington, but, predictably, importers don’t like the idea. The bill would direct the US Trade
Representative to negotiate a remedy for the VAT inequity on goods and services within the World
Trade Organization (WTO). If there is no negotiated solution by Jan. 1, 2009, the United States
would charge an offsetting assessment at the US border on imports of goods and services equal to
the amount of the VAT rebated by the country with a VAT. The United States also would issue rebates
equal to the amount of VAT taxes paid by US exporters. Because these practices would require
amendments to WTO rules, this idea faces pretty rough sledding.

Legislation to liberalize the government assistance eligibility criteria for workers who lose
their jobs due to import competition is pending in the House and Senate. The legislation would
expand the long-standing trade adjustment assistance program, and by streamlining the process would
make it easier for displaced workers to receive retraining that could help them re-enter the work
force sooner. One important step would automatically qualify displaced workers for adjustment
assistance benefits in the event of layoffs or plant closings.

Displaced workers enrolled in training programs would receive up to two years of unemployment
benefits while in job training. Workers also could be eligible for relocation allowances and
re-employment services.

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July/August 2007

The chairman of the House Ways and
Means Committee’s Trade Subcommittee has sharply criticized the Bush administration’s trade
policies with China and says changes will have to take place.

At a Ways and Means Committee meeting August 2, Rep. Sander Levin, D-Mich., said the
administration has failed to deal with “China’s trade distorting policies that have led to a major
imbalance in trade.” He said that China, because of its size, human resources and its “major
combination of individual enterprise and government involvement in the economy,” has become a major
force in the global economy that has resulted in changes “more profound than we expected.”

Levin charged that the administration has failed effectively to use the special safeguard
mechanism Congress included in legislation granting permanent normal trade relations status to
China. He also said the administration has been unwilling to use the World Trade Organization’s
dispute resolution mechanism despite repeated requests from members of Congress that it do so.

He singled out the administration’s go-slow approach to resolving the Chinese currency
manipulation issue as a failure because Treasury department officials are relying on technicalities
to avoid branding China a currency manipulator. He concluded his statement by saying, “For years
there has been a hands off approach to trade policy while some of our trading partners have taken a
gloves off approach.”

Testifying at the same hearing, Auggie Tantillo, executive director of the American
Manufacturing Trade Action Coalition, said, “China’s predatory trade practices are crippling US
manufacturing, and hopefully this hearing is an indication that Congress intends to take prompt
action this fall against those policies.” He called for congressional enactment of legislation to
combat currency manipulation and a measure to offset what he said is a trade disadvantage to US
manufacturers and service providers caused by the imposition and rebating of foreign border
adjustment taxes, mostly in the form of value-added taxes.

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August 7, 2007