WRITTEN TESTIMONY OF

COALITION FOR A PROSPEROUS AMERICA

BEFORE THE UNITED STATES HOUSE OF REPRESENTATIVES

COMMITTEE ON WAYS AND MEANS

HEARING ON THE EXCHANGE RATE POLICY OF THE GOVERNMENT OF THE PEOPLE?S REPUBLIC OF CHINA, AND ITS IMPACT ON THE U. S. AND GLOBAL ECONOMIES

HEARING DATE MARCH 24, 2010

Thank you Chairman Levin, and members of the House Committee on Ways and Means, for allowing the Coalition for a Prosperous America to present this written testimony to you.  We respectfully request that this written testimony be accepted into the written record for this hearing.

SUMMARY OF TESTIMONY:

The Coalition for a Prosperous America, and its members, support neutralizing the persistent undervaluation of the Chinese renminbi through countervailing duties and/or anti-dumping duties.  This can best be accomplished through passage of the Currency Reform for Fair Trade Act of 2009 (H.R. 2378).  There is wide agreement that China persistently undervalues its currency and that the impact is a mercantilist one, not a free-trade result.  The quantity of undervaluation is anywhere from 25 to 50 percent, a range that is agreed upon widely.  This currency manipulation has in large part been an underlying cause of the Great Recession. 

The volume of manufacturing and jobs off shored because of this unfair trade tactic has been devastating.  As Treasury Secretary Geithner has argued, we cannot grow GDP without correcting this problem.  Diplomacy and negotiation have been tried for several years, reached the upper levels with President Obama’s November 2009 visit to China, and failed.  Enforcement of international norms, which disallow such undervaluation, is necessary.  The U.S. House should pass the Currency Reform for Fair Trade Act for 2009 (HR 2378) to neutralize this currency advantage and return to free and fair trade.  Passage of HR 2378 is the most significant jobs creation and economic growth action that this body can take.

BACKGROUND OF CPA:

The Coalition for a Prosperous America (CPA) is a national, nonpartisan organization representing the interests of 2.7 million citizens through its farmer, rancher, manufacturing and organized labor association and company members.  Our members include industry sectors such as farming, ranching, steel, aluminum, tooling and machining, electronics, textiles, service industries, cattle production, crop production and many other sectors.  We advocate only on issues in which all sectors agree.  Our members unanimously agree, and place a top priority upon, neutralizing the currency undervaluation caused by China and other countries.

THE GDP PROBLEM CAUSED BY THE TRADE DEFICIT:

Our recent recession was, by definition, the result of a contraction of gross domestic product (GDP).  GDP is a mathematical calculation including four factors:  (1) Consumption; (2) Investment; (3) Government Procurement; and (4) Net Exports (exports minus imports).  

In recent years, the U. S. has experienced record Net Imports, not Net Exports.  Net Imports means our trade balance directly and mathematically depressed GDP.  (The Administration has a new goal to double exports in 5 years, but the issue is not absolute exports, but Net Exports.)  Production and jobs were off-shored, so we imported and consumed products rather than produced them.

Because such a high volume of production and jobs was off-shored, Investment followed that production elsewhere.  Investment that would have occurred here occurred elsewhere.  Therefore, in the last ten years, net Investment has been zero in the United States.  GDP was not assisted at all by Investment.

The result is that GDP has been supported by Consumption and Government Procurement only.  Investment contributed nothing.  And Net Imports depressed GDP.  

We cannot build an economy on Consumption and Government Procurement alone.  We have to produce, invest and export more than we import in order to stop foreign borrowing and begin to pay down our massive international debt.  The solution is to fix trade policy, rebalance our current account deficit, and produce more here.  Doing so will negate the Net Import problem; cause substantial Investment; add millions of jobs; and grow GDP.

FREE TRADE CANNOT EXIST WITH MANIPULATED CURRENCIES:

Classic free trade permits little or no government intervention in terms of tariffs, subsidies, or nontariff/nonsubsidy barriers and market distortions.  There is debate as to whether classical free trade can truly exist among diverse economies, but we will assume it can for purposes of this testimony.  

Free trade cannot exist unless respective national currency values reflect their true market value.  In other words, if currency values do not adjust to changing market conditions (whether by a repeg or a float), then free trade cannot exist.  That is because changes in currency valuation will occur in the free market to counter persistent trade deficits or trade surpluses.  Persistent trade deficits or trade surpluses are destabilizing to the global economy and to national economies.

The manner in which currency valuation changes remedy persistent trade deficits or trade surpluses is as follows.  When Country A has persistent net exports, its economy grows, and its currency should appreciate in value.  With appreciation, Country A?s exports become more expensive, less attractive on the world market in relation to competitors, and exports thus decline while imports rise.  Country B may have persistent trade deficits (net imports).  County B’s economy thus slows its growth (or contracts).  Its currency valuation should decline.  Its export offerings become cheaper on global markets, thus more attractive to buyers, while imports become more expensive, and Country B?s net trade rebalances to a more positive level.

China (and other Asian countries such as South Korea, Japan, Taiwan and Singapore) manipulate their currency values at the expense of countries with free-floating currencies.  This trade strategy is both protectionist (protecting against import competition) and mercantilist (facilitating exports unfairly).  China is the most egregious and noteworthy currency manipulator because of the size of its economy, the brazenness of its efforts, and its percentage share of the U.S. trade deficit.  We believe its currency is at least 35 percent undervalued, making Chinese exports 35 percent cheaper than it would otherwise be (an export subsidy) and making U. S. sales to China 35 percent more expensive than they would otherwise be (a tariff).  

CHINA?S LABOR COST ADVANTAGE IN THE CONTEXT OF CURRENCY MANIPULATION 

China is sometimes assumed to be a low cost manufacturing country, in large part because of cheap labor.  However, China is a high-cost manufacturing country because of low productivity, immature infrastructure, and the artificially high cost of imported energy and components, among other factors.  While labor costs are a local market, capital and raw materials costs are more often priced in international markets.  Thus China can only have an advantage on labor, but not necessarily raw materials and capital costs.

The labor cost differential is largely irrelevant to trade where currency manipulation exists. There are few major U. S. production sectors, if any, wherein labor makes up 35 percent or more of the cost of production.  Let’s assume an industry sector in which labor is 10 percent of the cost of production.  Let’s further assume that we could, by government fiat, cause the labor input portion of costs to be zero.  If that occurred, China would still have a 25 percent advantage due to currency alone.  

U.S. producers of food and goods have to reduce their costs by an astounding 35 percent to become competitive with the Chinese due to their currency intervention.  (We ignore, for purposes of this testimony, other Chinese government subsidies.)   U.S. competitiveness internationally is not a serious topic unless we address this unfairness.

Free trade cannot exist unless the currency undervaluation problem is neutralized as a tariff and subsidy.

REMEDY:

Enforcement of international trade norms must be a priority if the U.S. is to be a successful economic country.  If rules are not enforced, international trade breaks down and produces harm instead of benefit.  Neutralizing the Chinese currency advantage through countervailing duties, anti-dumping duties, or carefully calibrated tariffs is essential.  

H.R. 2378 should be approved by this Committee, and passed on the House floor.  Persistent currency undervaluation is a violation of the IMF Charter.  The IMF has an agreed-upon method to quantify the level of persistent currency undervaluation.  U. S. trade laws are set up to neutralize wrongful foreign subsidies.  Persistent currency undervaluation is a subsidy.  H.R. 2378 will categorize persistent currency undervaluation by trade rivals as an unlawful subsidy.  Existing enforcement mechanisms of U.S. trade law can make a major dent in the problem.   In other words, HR 2378 creates no new substantive law.  Rather it takes existing international norms and creates a remedy for them under U. S. trade laws.

SUMMARY:

America cannot recover from the Great Recession with job growth and production growth without remedying the currency problem.  This issue is mature and has been deliberated.  Diplomacy has failed.  China has a far stronger incentive to continue its undervaluation than to revalue.  Enforcement is the sensible approach, and cannot be determined a radical approach.  Those opposing enforcement are protecting the protectionism of others.

It is worth noting as well that, unlike other approaches to stimulating the recovery and restructuring of the American economy, passage of H.R. 2378 would not require new government spending.

We encourage this committee to mark up HR 2378, approve it, and move that bill to the floor of the House for a full vote.

Respectfully submitted,

Brian O’Shaughnessy, Chief Co-Chair and Manufacturing Co-Chair of CPA
(Chairman, Revere Copper Products)

Joe Logan, Agricultural Co-Chair of CPA
(Director, Agricultural Programs, Ohio Environmental Council)

Bob Baugh, Labor Co-Chair of CPA
(Executive Director, AFL-CIO Industrial Union Council)