Get ready for a four-way train wreck on trade policy. The engineers: The Bush administration, the Democratic leadership in Congress, the Democratic back-benchers, and the government of China.
Get ready for a four-way train wreck on trade policy. The engineers: The Bush administration, the Democratic leadership in Congress, the Democratic back-benchers, and the government of China.
The Bush administration dearly wants a renewal of the president's authority to negotiate more trade deals. The House and Senate Democratic leadership sees an opportunity to win a long-sought Democratic goal -- the addition of labor standards to trade deals.
On Wednesday, at a hearing of the House Ways and Means Committee, chairman Charles Rangel, a New York Democrat, warmly welcomed U.S. Trade Ambassador Susan Schwab. "I am very pleased with your leadership," he said. Rangel is pleased because the White House has agreed in principle to a deal bartering negotiating authority for labor standards.
But many other Democrats in Congress are not pleased. They see echoes of past trade deals such as NAFTA, whose language on labor rights turned out to be meaningless in practice.
There is widespread skepticism that the Bush administration would agree to language guaranteeing, for instance, the right of workers in countries with favorable trade deals to join or organize unions. (The administration doesn't even enforce that right for American workers.) The issue threatens to divide the Democratic leadership from most newly elected members.
And that's just the beginning of the trade wars. This week, the Commerce Department reported the trade balance for 2006 -- a record deficit of $764 billion. Nearly one-third of that was with China.
The same Democrats willing to make a deal on negotiating authority are not backing down on China. Rangel and House Speaker Nancy Pelosi have proposed a measure to increase tariffs on countries that subsidize their exports, the prime offender being Beijing.
The U.S. China Economic and Security Review Commission has documented extensive subsidies by the Chinese government, which offers American manufacturers billions of dollars to underwrite costs of land, facilities, worker training, and tax holidays. Most products of these factories go right back to the United States and widen China's trade surplus.
While explicit export subsidies are illegal under the World Trade Organization, there is a loophole for implicit ones such as those that China uses to attract U.S. multinationals. Rangel and Pelosi intend to remedy that by changing U.S. law, and their legislation setting retaliatory tariffs is expected to attract substantial Republican as well as Democratic support.
As a challenge to Beijing, this legislation comes at a moment when Chinese officials are beginning to talk about diversifying their huge portfolio of foreign currencies, the fruits of their chronic trade surpluses. With $1.07 trillion worth of foreign currencies, China has surpassed Japan as the world's largest holder of foreign exchange. And China's immense stash of dollars happens to be a prime source of funding America's national debt.
As Congress increases the pressure on the Chinese to reform trading practices, there is anxiety in Washington about China resorting to its financial neutron bomb, the threat to diversify its currency holdings out of U.S. dollars.
In January, Premier Wen Jiabao said that China would "strengthen the management of its foreign exchange reserves and actively explore the channels and methods of using the reserves." That comment had currency traders wondering whether China would soon begin dumping dollars.
Even a serious hint in that direction would cause the dollar to tumble in foreign exchange markets, where it has been none too strong lately. And a swooning dollar would require higher interest rates and economic slowdown at home.
Diplomacy has not been this administration's strong suit, nor has nimble negotiation with Democrats in Congress. The White House could strike a deal over labor standards, only to find the congressional leadership needing to placate its restive rank and file with tougher measures on China. And if the dollar should take a dive on Bush's watch, along with the economy , the result would be more Bush's recession than the Democrats'.
The coming showdown over China -- and perhaps with China -- lacks the drama of the Iraq disaster, but could be every bit as serious. And like Iraq, it is hard to imagine an easy solution.
China needs foreign industry to provide jobs for its growing population. The Bush administration needs China to fund its huge deficits. American business thinks it needs cheap labor and foreign subsidy. And the Democrats need to reform a co-dependency that is bad for American jobs and is ultimately unsustainable financially. But, as with Iraq, getting out of this mess turns out to be a lot harder than getting in.
Robert Kuttner is co-editor of The American Prospect. A version of this column originally appeared in the Boston Globe.
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