REGULATIONS
U.S. Congress Changes Hands: Democrats Likely to Take Stronger Stance on Currency Issue
January 5, 2007
Karen McClelland, AFP

Considering the U.S. dollar's recent volatility, policy makers remain concerned about the Chinese government's slow progress to revalue the yuan. Treasury Secretary Henry Paulson highlighted the issue in advance of his mid-December 2006 visit to China. In prepared remarks, Secretary Paulson noted that "[w]e will consider ways to achieve balanced growth, and talk about the importance of currency flexibility . . . " Further, during the same visit, Federal Reserve Chairman Ben Bernanke called China's currency policy an "incentive" to exporters.

Yet, in its December semi-annual report to Congress, the Treasury Department, once again, declared that China was not manipulating its currency. Several members of Congress do not agree with the Treasury's assessment and are pledging to take stronger action when Congress convenes for the current Congress Reacting to the report, incoming House Ways and Means Committee Trade Subcommittee Chairman Sander Levin (D-MI) said that the report "underscores the need for congressional oversight."

In the 109th Congress, many members of Congress supported legislation pressuring China to take additional steps to revalue its currency. Arguing that China's currency was undervalued by 15 to 40 percent, Senators Charles Schumer (D-NY) and Lindsey Graham (R-SC) introduced legislation in April 2005 that would have imposed stiff tariffs against Chinese imports unless the currency issue was resolved. A dozen senators co-sponsored the Schumer-Graham bill, including Senator Richard Durbin (D-IL) who stated in a meeting with Secretary Paulson that the U.S. should "send an unmistakable signal to the Chinese - stop the market manipulation or pay the price with your trading partners." Senator Max Baucus (D-MT) also proposed legislation in March 2006, addressing the sustained imbalances in currency exchange rates that harm the U.S. economy. In the House, Speaker-designate Nancy Pelosi urged the administration to put more pressure on China to loosen its currency controls.

Despite bi-partisan support for legislation, the Republican led Congress did not take any legislative action before it adjourned for the year. The outstanding question is, will the incoming democratically controlled Congress take more aggressive action towards China?

The Democratic Congress, emboldened by its election victory, is more likely to challenge the Bush administration on a variety of issues including its policy towards China. Several members of Congress, who advocate for a stronger stance toward China, will now hold key leadership positions. Senator Schumer will serve as the third-highest Democratic position in the Senate as the Vice-Chairman of the Democratic Caucus and will also serve as Chairman of the Joint House-Senate Economic Committee. In this position, he may exert more influence on scheduling votes and possibly hold hearings, increasing the odds that his legislation will make it to the Senate floor for a vote. Further, Senator Baucus will take over as Chairman of the Senate Finance Committee, one of the most influential panels in Congress. The Finance Committee has jurisdiction over international trade policy. Responding to this most recent report, Senator Baucus said that it is time for a "new approach" on this issue.

The Bush administration will have to find a balance between an increasingly hostile Congress, where many members, particularly Democrats, believe that the U.S. should "get tough on China," and a Chinese government that is reticent to move quickly toward currency flexibility.

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