Reply #28: The Slippery Slope (Roach) [View All]

[54anickel]

http://www.morganstanley.com/GEFdata/digests/20060331-fri.html#anchor0

The US Congress is working overtime on protectionism. As one senior Washington insider confided to me the other day, “concerns over China are boiling over in this town.” While extreme actions on the tariff front have been deferred -- at least for the moment -- it is starting to look as if an even bigger train has left the station. The angst of worker insecurity is proving to have irresistible bipartisan appeal within the American body politic. The odds are rising that Washington will enact some form of protectionist legislation before the mid-term elections this November. The dangerous slide down a slippery slope has begun.

The good news is that Senators Schumer and Graham have elected once again to defer a floor vote on their proposal for a so-called “currency-equalization tariff” of 27.5% that was to be levied on all Chinese imports into the US -- a surcharge they believe would provide fair compensation for an undervaluation of the RMB by a like amount. Last week in Beijing, they told me they had 80 votes in favor of their proposal, but we’ll never really know how solid that support was when it comes to going on record in favor of such a draconian action. There is a new threat of a 30 September floor vote on this measure, but my guess is that this type of extreme legislative action has now fallen out of favor in Washington.

In its place, a less contentious but very hard-hitting legislative option has now emerged -- “The United States Trade Enhancement Act of 2006 (USTEA06)” proposed by Senators Grassley (R-Iowa) and Baucus (D-Montana), the Chairman and ranking minority member of the all-powerful Senate Finance Committee. Unlike the Schumer-Graham proposal, this bill also appears to be far more palatable to the Bush Administration. In congressional testimony on 29 March, the Grassley-Baucus option was praised by senior officials from the US Treasury, the Department of Commerce, and the office of the US Trade Representative. This could well represent a sea change in the politics of trade legislation -- a bipartisan proposal with White House support.

In a nutshell, USTEA06 rewrites the book on how the United States both identifies and responds to external imbalances and currency “misalignments” -- the latter word being a deliberate and important substitute for the oft-contentious characterization of “manipulation” that has long plagued the foreign trade debate. The Grassley-Baucus bill empowers a new office in the US Treasury to develop a more sophisticated set of tools to identify those nations guilty of misalignments, and it establishes a consultation mechanism with the IMF and the US Trade Representative to arrive at this determination. Should a verdict of misalignment be rendered, USTEA06 offers a broad arsenal of remedial actions to be directed at the offending nation -- ranging from restrictions on trade finance, IMF voting rights, and the classification of a country’s trading status with the US. Unlike Schumer-Graham, which is a China-specific measure, the Grassley-Baucus proposal is more of a generic piece of legislation. But its sights are certainly set on the elephant in the room -- coming to grips with the biggest piece of America’s trade gap, a US-China bilateral trade deficit that hit $202 billion in 2005.

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Trade has become the economic lightening rod in this political season. If anything, the pressures for legislative action will only intensify between now and the mid-term elections in early November. Within the Congress, support for action is bipartisan and deep -- and it’s building momentum by the day. A politically weakened White House is unlikely to buck the tide. All in all, politicians who are soft on trade will be characterized as unsupportive of the plight of the beleaguered American middle-class wage earner. With the political fix increasingly at odds with the macro fix, the odds of a disruptive US current account adjustment are rising.

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