Schumer: Dramatic Increase In Trade Deficit With China Shows Effects Of Currency Manipulation

Today Sen. Charles Schumer reacted to reports that our trade deficit with China hit $162 billion, up over 30% from 2003. Many economists believe that the highly devalued Chinese currency, the Yuan, has helped make this possible. As China continues to peg its currency and the US trade deficit with China reaches these record levels, Senators Schumer and Lindsey Graham (RSC) recently unveiled legislation to impose an acrossthe board tariff on Chinese imports in an effort to address China's unfairly undervalued currency (The China Currency Bill, S. 295).

"Todays numbers dont lie. The Commerce report shows that Chinas refusal to play by international economic rules cripples our ability to compete on a level playing field. The trade deficit numbers we see today show the tremendous increase in our trade deficit with China and should be a red flag to the Congress and to the global economy. The Chinese want to have it both ways: On the one hand they want free trade and membership in the WTO and other international trade organizations. But on the other hand, they don't want to play by the rules of those organizations," Schumer said.

The Commerce Department reported today that the deficit for all of last year soared to a record of $617.7 billion, 24.4 percent above the previous record. The trade deficit was $496.5 billion in 2003. The U.S. deficit with China also set a record of $162 billion, up 30.5 percent from last year and the largest imbalance ever recorded with a single country. For all of 2004, imports also rose 16.3 percent, setting a new record of $1.76 trillion.

Schumer continued, "This report proves that our bipartisan legislation is needed as a toughlove effort to get the Chinese to stop playing games with their currency."

The SchumerGraham bill allows for a 180 day negotiation period between the US and China to revalue its currency, if the negotiations are not successful, a temporary across the board tariff of 27.5% will be applied to all Chinese products entering the United States a penalty that corresponds to their estimated currency advantage. Since economists estimate that China undervalues its currency between 15 percent and 40 percent, 27.5% represents the midpoint range. Furthermore, if the President determines that at the end of the negotiation period that China has developed and started actual implementation of a plan to revalue its currency, he may delay imposition of the tariff for another 12 months.

The Yuan has been tightly pegged to the U.S. dollar since 1994 (approximately 8.28 Yuan to the dollar). During that period of time, Chinas economy has grown dramatically, averaging over 8% per year. If Chinas currency freely floated in the market, as is the case with virtually all major world currencies, it would have appreciated substantially reflecting China's underlying economic strength. However, it has remained at the same pegged value, and the result is that many economists estimate that the Yuan is now undervalued by between 15 and 40 percent.