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China's Currency and U.S.-China Trade Policy

Speaker: Charles E. Schumer, U.S. Senate (D-N.Y.)
Presider: Nancy E. Roman, vice president and director, Washington Program, Council on Foreign Relations
June 8, 2005
Council on Foreign Relations



Council on Foreign Relations
Washington, DC

NANCY ROMAN: I’m Nancy Roman, vice president of the Council on Foreign Relations and director of our Washington program here, and I am absolutely delighted to have Senator Schumer with us this morning from the fine state of New York, where he is serving his second term and now sits on the powerful Senate Finance Committee with the broad jurisdiction over trade matters.

Before being elected to the Senate in 1998, he served 18 years in the House representing Brooklyn and Queens. He served three terms in the state assembly before that. And throughout his long and distinguished career he has been associated with a host of legislative initiatives, many of which are familiar. He helped draft the assault-weapons ban; he’s the author of the landmark Violence Against Women Act, but perhaps no measure has garnered more attention than his current proposal, which would flat—[laughter]—he led—

CHARLES SCHUMER: Ask the NRA [National Rifle Association] about that. [Laughter.]

ROMAN: His current bill, known around town as the “Schumer bill,” would—

SCHUMER: Schumer brand. [Laughter]

ROMAN: —would impose 27.5 percent tariffs on Chinese exports, is, in fact, unless the president were to, to certify that China’s no longer manipulating its currency. Now some see this as a very welcome move that will finally get the Chinese to revalue the currency and play by the rules, and others fear that the hammer is a bit too heavy and could spark a trade war. There’s a lot to talk about.

The format this morning will be that Senator Schumer will make his remarks. He and I will engage in a brief conversation of no more than 15 minutes, and then we’ll open it to you. Unlike many Council meetings, this one is on the record but I would ask you, in Council tradition, to turn off your cell phones, beepers, gadgets, anything else that makes noise, and Senator Schumer, we’re delighted to have you.

SCHUMER: Great. Well, thank you, and I am glad to be here, Nancy, and I want to thank the Council for sponsoring this kind of forum, which I really love, where we can have a give and take, and we can each learn.

First I’ll tell you, I always like to tell a story. I hope my little remarks this morning go better than remarks I gave in my old congressional district, the 9th CD in Brooklyn and Queens. Because, at the end of that speech, a woman came over to me, one of the senior citizen activists who populate the old 9th CD in great numbers, and she came over to me and said, “Senator, I thought your speech was absolutely superfluous.” [Laughter.] Well,I didn’t want to let that remark go unanswered, so I responded. I said, “Thank you, ma’am.” I plan to publish it posthumously. [Laughter.] But in the 9th CD, the senior citizen activists always get in the last word. She put her hands on her rotund hips, she waved her finger right in my nose, and she said, “Senator, I just can’t wait.” [Laughter.]

Anyway, I am glad to be here. I hope what I say isn’t superfluous. I doubt it will be published posthumously or otherwise, but I’m glad to be here and thank the Council.

And let me give you just about five minutes or so on our bill, its origins, what its intentions are.

You all know about our bill. It’s the Schumer-Graham bill. Lindsey Graham has been a great partner. He’s a Republican from South Carolina. I try to do most things that I can do in the Senate in a bipartisan way. And, as you know, the bill just won a major procedural vote. It got 67 votes on the floor. We withdrew it at the request of both the Senate leadership and the administration. We’ve been promised a vote before the July break. We were made, it got 67 votes. We were wondering if it would pass. It had the opposition of the chair of the Senate Finance Committee, Senator [Charles] Grassley [R-Iowa], as well as the ranking Democrat, Senator [Max] Baucus [Mont]. But I think it showed where the American people and where the Senate are at. And that is they are very frustrated with Chinese currency policies and, frankly, with Chinese trade policies in general. And let me elaborate.

But the first point that I want to make is we believe our bill is the free-trade bill. And all the opponents who are calling us protectionists have never talked to us. They get on TV and they yak, yak, yak. But they have not even talked to us about it.

Here’s why it’s the free-trade bill. A tenet of free trade is that currencies float, plain and simple. Yes, we used to peg currencies to gold or something else a very long time ago, but that was before there were lots of trade flows. Once you have a lot of trade flows back and forth, you need the currency to float and, in fact, it becomes self correcting. When there’s a big trade deficit and currencies float, the value of exports of that country goes up, the value of imports goes down, it’s self correcting and the balance occurs. And it creates markets. It creates one world market. It allows efficient producers in a country to succeed and inefficient producers in that country to fall to competition. Nothing could be more a part of the tenet of free trade than to let your currency float.

And so we believe that our legislation, whose sole purpose is to get the Chinese to play by the rules that every other major power trades by, is a free-trade proposal.

And we’re sort of surprised when sort of very doctrinaire, usually academic free-trade advocates—I mean, they can call our bill protectionist, that’s not its intention. It’s not intended to build walls; it’s intended to bring down walls. But they sort of attack—when America does things that are not free trade, they attack those things, as they should. And when America does things to encourage free trade elsewhere, they also attack what’s being done here like our bill. And it’s sort of hypocritical.

They may differ with the tactics, but there are even some now who get so backed up into the position they’re saying not having currencies float is the right way to go. And I don’t know any economist who advocates that of any repute.

This issue is not going to go away. It is not intended to remedy our balance-of-trade deficit. It will reduce it, maybe by a quarter, particularly if the other Asian currencies, once China lets its currency float, also allow theirs to float. But we know that there are fundamental structural problems in America that helped create our trade deficit.

But that’s not the point here. The point is to allow free trade to function. To allow in a global economy the most efficient industries to prosper and the less efficient industries to fall by the wayside. That’s how things work. And we all know that the budget deficit causes lots of problems. I think you’d have to talk to President Bush a little bit about that, if you are. But the very same people who are doctrinally against our bill don’t even seem to go after him on the budget deficit. That’s the bottom line.

Our fundamental view is that the Chinese government does not really believe in free trade. They want the benefits of free trade but not the responsibilities. And this is shown by their policies elsewhere, and you have to understand this when you want to understand why the House and Senate feel the way they do. I mean, we all know what’s happened with intellectual property.

For a decade; intellectual property is America’s family jewel, economic family jewels. They’re the best thing we have going because we’re the most creative entrepreneurial country, and we create great ideas. Protecting that property is also a tenet of free trade and something that I’ve stood for. My constituency in New York is a great generator of ideas. They’re mainly intangible ideas, whether they be financial or communications or entertainment, and they should be protected.

Well, talk to any of the large companies who try to deal with intellectual property and what they’ll tell you is that it’s not that, oh, it’s just stolen by a couple of rogue outlaws in China. They’ll tell you that the government completely acquiesces.

But it goes beyond intellectual property. Let me tell you two little stories that our New York companies; every senator can tell you stories.

One is a big company, GE. You may remember there was a story in The Wall Street Journal—one of the few things, manufacturing things, left that GE does in New York is make turbines. Up in Schenectady, it employs 4,000 people. GE has the best technology for that. Somehow, it’s sort of like Boeing had it with the airplane wing. They let the turbines go round and around very fast and they don’t get heated and they are very efficient. The Chinese had a huge contract, they have great power needs, and they told GE, “We’ll give you the contract, but at the end of the contract, we want the technology.” And GE said yes. Now by the way, that’s a violation of the WTO [World Trade Organization], but GE wasn’t going to sue. [Laughter] What does that mean? It means that GE gets a great profitable contract for ten years or however long it was, and then that technology will be used in China.

So let me tell you another story that is more apropos, and this is the kind that congressmen hear all the time, a small company. Cortland, New York, is a manufacturing town 30 miles south of Syracuse. It’s suffering. It had; Smith Corona typewriters were made there. I don’t know if any of you bought one in the last five years. [Laughter.] It had Buckbee Mears, which makes ball bearings, which laid off a whole lot of people. But the one shining light of Marietta is, of Corning is, of Cortland, is a company called Marietta. You’ve used their products. They’re the world’s largest maker of the little soaps and shampoos that you get in a hotel or motel.

And the way Marietta—this was told to me by the CEO—the way Marietta gets its business is they go to the big international hotel chains and you, and they say to them, “You pick the smell of the soap, the color of the shampoo, and we’ll make sure it’s in every one of your rooms worldwide every morning.” So Hilton and Four Seasons and all these, they have Marietta as their client.

Only one country doesn’t let Marietta’s products in. They abjectly say no. China. And there’s now a Chinese company that supplies Hilton and the others in China at a much higher profit, and they’re using that protected base to compete with Marietta now in East Asia, soon in Europe. I say to Mr. [inaudible], the head of Marietta, “So why don’t you bring an action with the WTO?” He says. “Yeah, in 11 years I’ll have an answer and I’ll be gone.” That story can be repeated over and over again.

It is my belief what’s going on in China is this. While the finance ministry and the central bankers realize that free trade is the way to go and it will ultimately benefit China in the long run, the communist leadership of China—the leadership—is not. And they’re basically mercantilists. For whatever reason, they believe that they should accumulate as much money as they can, export; they want wealth. And when free trade helps them gain that wealth, they’re all for it. And when free trade doesn’t help them get that wealth, they just say they don’t care. So it’s going to take a while to get China to live up to the responsibilities of free trade, and it’s going to take more than talking.

And I’d just make one other argument before I get into a little bit of the details of our bill. If we don’t have real free trade; free trade is a tough argument politically, because it creates all kinds of economic dislocations. People lose jobs. That’s very hard for people. You know, when you’re a politician, you see it far more up close than if you’re not. When people come to you and look you in the eye and say. “I lost my job for no fault of my own, I’ve worked hard for 25 years,” you feel impelled to try and help them, but not at the expense of the rest of the country. And I basically believe that free trade as a philosophy works.

But when Americans have advantages; when I sit down with the head of Crucible Steel in Syracuse or Stickly Furniture and they tell me, “I can compete even with lower wage costs than China, but not if there’s a 20 to 30 percent added advantage because of currency manipulation, I’m going to go out of business if that occurs,” you feel an obligation to do something.

But the greater point is this. If people don’t feel at least the rules are fair, and when America competes well and efficiently that we gain, then free trade will not happen. It will decline. It’s already fragile.

And so we believe—Lindsey Graham and I and the sponsors of our bill—that we’re actually helping the cause of free trade. Look at what just happened with the textiles. China has basically played by the rules with textiles. But when America imposed, you know, the quotas or sanctions or whatever they just did, nobody made a peep. Even the free-trade community didn’t; maybe a few businesses that have self-interest. Why? Because people felt, well, the rules aren’t fair anyway, so if we take advantage and don’t play fair, it’s okay. And what I’m telling you, and I can tell you this as a politician from a broad, diverse state that both benefits from free trade and benefits overall from free trade, but also has—you know, we see the problems—that unless we move more quickly to play more fairly, that the attitude of some will attack American interests when they don’t want free trade but when there is free trade let other countries just sort of shrug their shoulders and say that’s okay, we’re going to lose the whole ball of wax.

Our bill. We believe talking to the Chinese is not going to work. It’s been tried for two-and-a-half, three years. Guess how much progress there has been? Zero. There’s been verbiage.

We introduced our bill two years ago. The administration asked us to delay, give us a chance to solve this problem in negotiations. We did. We didn’t put it on the floor two years ago and we didn’t put it on the floor last year. But we’re frustrated because we don’t think talking does the job.

Now our bill is not intended to erect a wall. It’s intended to get China to play fair once and for all. And that’s why, even if it should become law, it says there’s 180 days to start negotiations, then if the president certifies in 180 days that there’s progress, there’s another 180 days for more negotiations, and then if there’s progress, there’s another year. That’s two years before anything would take effect. But without something more than verbiage, we will not make any progress.

And I want to tell you, conclude by telling you one story. I have some knowledge in this area. This is not the first time I’ve made a foray into this.

In the late ‘80s, Japan would not allow American financial firms into Japan. And Nomura and the big banks were all over America and New York competing with us, but Merrill Lynch could not get a seat on the Tokyo Stock Exchange. Citibank, even though they had the technology and the Japanese banks didn’t, could not open an ATM. And so I put in a law in the House—I was a congressman—that said the Japanese could not be primary dealers in this; I didn’t name the Japanese, but in effect that’s what it did; our bill doesn’t name China-but the Japanese could not become primary dealers, which they were very eager to do—it was sort of the Good Housekeeping Seal of Approval that said you’ve arrived as a major financial player—as long as they prohibited our practices in Japan.

The same thing happened. “Protectionism! You’ll create a trade war! The Japanese will withdraw of holding their currency!” Which, that argument makes no sense because, if you have a big asset, you don’t cut your nose to spite your face and make the asset less worthwhile. And everyone hollered and screamed. I said, “Well, get some change over there. Don’t yell at me.” And all of a sudden, so I finally, I delayed, was forebearing, at least as I can be, and, but the bill finally passed the House. And all of the sudden, the Japanese, which said there’s no room on the Tokyo Stock Exchange for Merrill Lynch, found space. And all of a sudden, the American banks were allowed into Japan and it’s created tens of thousands of good jobs in New York, it’s increased competition. Frankly, the Japanese financial-service industry hasn’t done that well. We were better at it. But they’re better at certain things, too.

And so all of this as we might say in Brooklyn [inaudible], flies in the face of at least my experience, that you can be tough and smart and achieve your goals rather than just throw up your hands and not get anything done. Thank you.

ROMAN: Thank you. Well, I think a lot of what you’ve said captures the sense that the public shares, which is why I think there’s a surge of support over a relatively short period of time for your bill. I guess one of the questions I have is, is what if the Chinese do begin to move very slowly. Say they were to widen the band 1 to 3 percent.


ROMAN: Wouldn’t a lot of the things you describe—you know, Marietta for example—remain in place and, and wouldn’t we still have the frustrating tension that’s driving all the support?

SCHUMER: We are realistic, and we know that China can’t implement, can’t go from today to tomorrow to just let the yuan float. We know that. That’s why our bill has that two-year built-in period into it, even should it become law. But what we’re looking for is two things: A, a time table, not to say 1 to 3 percent. You know, some people write, well — both The New York Times editorial board and The Wall Street Journal editorial board said, well, if they let it change 5 percent, it’s not going to change much. That’s not our bill. We don’t demand that they do it immediately, but we demand a timetable so that the currency will eventually float. That’s point one.

And point two is tangible steps in that direction. So if they said 1 to 3 percent this year and then 5 to 10 percent, you know, a year from that, and then 20, we would certainly be open.

We’ve had high-level discussions with the leaders of our country, and on this, and they know that we are flexible. But we have to see two things: no more verbiage, actual change; and a timetable by which we can measure progress and have some idea that we will finally reach our goal, even if not immediately.

Incidentally, high-level administration officials who obviously will remain nameless have said, “Keep it up, you’re the only thing we got to bring progress.”

ROMAN: Okay. Now one of the things, you know, you, you’ve argued that your bill is a free-trade bill and certainly there’s a free-trade aspect to it. Part of the reason it’s getting attention is because it does have teeth. Is there a scenario in which you can see these 27.5 percent tariffs being imposed? And if they were, just what’s your sense; I’m sure you’ve been hit with a lot of people talking about the trade war and the potential downside ramifications for the U.S. economy. Could you just speak to that?

SCHUMER: Yeah. Well, let me say this. I mean, I think that is, again, that’s sort of rhetoric; that’s not reality. People don’t look at our bill. First, it’s my belief that the Japanese experience will be mirrored. That, as this bill looks more and more realistic; after all, for the first time, the Chinese are talking seriously to us, you know, then they get up and say any pressure will be counterproductive. Well, lack of pressure has been totally counterproductive [laughter], you know? So they say any pressure will be counterproductive. Bull.

You talk to the people doing the negotiations. For the first time, they’re serious. That’s cause our bill got 67 votes. When Lindsey Graham and I went to the floor that day, we said, “Do you think we’ll get half?” We didn’t expect to get 67 votes. But again, when you go talk—and it got it across—it got a majority of Democrats, a majority of Republicans, all regions of the country, not just the South or the Middle West, you know, which are supposedly more affected. And so we believe, I believe, that the Japanese experience will happen; that at some point, as this bill progresses, whether through passage or even after passage given the length of time we have, that we will never get to the tariff situation and we will get the Chinese to float their currency, which they should do.

You know, and let me just say one other thing. If China were a minor trading player; I mean, lots of other countries peg their currency. They’re tiny little countries. They can’t stand up against the dollar with their own economic system. They’re a major player now. They’re one of the biggest trading, and they haven’t even begun to make progress. This bill would be nowhere if the Japanese, I mean the Chinese even did a 1 to 3 percent two years ago. It’s basically the view, shared as I say, by people within the administration as well as in Congress, that they will not move unless with faced with something, as you say, Nancy, with teeth.

ROMAN: Okay. Well then on that point, there are lots of other measures on the Hill right now, and one of the things I’m beginning to hear is that your bill has sort of personalized support. It’s sort of gotten the Hill focused. But what about these other measures, countervailing duty is the [U.S. Representative Duncan] Hunter [R-Calif.] bill, [Senator Susan] Collins [R-Maine] bill. Is there a reason why this approach is superior to that in terms of getting Chinese attention?

SCHUMER: Well, the bottom line is that I think our bill is the big train. [Laugher] It’s the only one that’s been voted, voted on the floor. It’s the only one that’s gotten this kind of support.

And why did we focus on currency? Why didn’t we say, “OK, we’ll impose a tariff if they don’t meet following standards on intellectual property?” It’s A, because currency affects every industry. Every efficient American industry, in least in terms of exports to China, has a—whatever you’d estimate the devaluation is—we estimated 27 [percent]. That was, you know, we went to experts; we didn’t pick the number 27 and a half percent. The low was 15, the high was 40, and the average was 27 and a half. That’s why we picked 27 and a half. And, but, so every efficient American industry has a 27-and-a-half-percent disadvantage in exports and a, and Chinese companies, conversely, have 27-and-a-half-percent advantage.

So currency, and currency also affects the world trading system. Why have the Japanese, just the finance minister a few weeks ago, the EU [European Union], why are they now part of the drumbeat to get the Chinese to do this? Because if the dollar and the yuan are pegged, it creates all kinds of economic dislocations, inefficiencies that affect the euro, that affect the yen, that affect all the other currencies. So even the two, even countries that are not involved directly are affected by it.

So currency is at the root of this in terms of it being across the board and in terms of affecting the whole world trading system. But again, I think a lot of the support for our bill occurs because we feel there’s been no progress. In other words, look, I mean, this hurts our legislation, but if tomorrow there was a new regime on intellectual property, the support for our bill would decline, even if currency didn’t budge a bit. It’s sort of the focal point, and we wanted to make it the focal point because it’s so broad-based, of all the frustrations.

ROMAN: Okay. One last question and then I’m going to open it up. CAFTA [Central American Free Trade Agreement]. Right now, people in both parties who are working pretty hard to try to move CAFTA are having real trouble. And one of the things that has come up is that this anxiety about China is bleeding over. People feel like they can’t support any free-trade agreement until China is dealt with.

I’m just wondering if you could sort of discuss generally, what is your sense of what’s happening on the Hill? On the Hill; I know people don’t like the word protectionism, so let’s not say is the Hill becoming more protectionist. Is the Hill collectively becoming more anxious about—


ROMAN: —about free trade and globalization? And what do you think that means?

SCHUMER: No question about it. And I think the frustration with China bleeds over. Look, there are some people who are going to be protectionists. I don’t mind using the word, regardless. They don’t believe in free trade. Maybe that’s a third of the Congress. And these are very rough cut; I’ve done no actual survey.

And then there’s a third of the Congress who is free trade. Part of it’s geographic, part of it’s ideological. But the middle third, which is the swing vote basically, is willing to entertain free trade with all its problems, the problems it creates for their own constituencies, if they think it’s on the level. And the fact that there is more and more of a feeling that it is not on the level, A, provides an excuse for the real protectionists; but B, shifts people away. And I think CAFTA, again, I would make this argument that—I don’t know if it’s true, but it seems logical to me—that if there were no problems with China, CAFTA would have a lot easier sailing.

Now CAFTA also has an unusual nexus. They have two problems, both from different places. They have the usual problems with labor agreements and all of that, but they also have the sugar problem.

ROMAN: Okay. We’re going to open it up. If you would wait for a microphone and introduce yourself and state your affiliation. Sir?

QUESTIONER: Denis Lamb. Senator, I appreciate your coming here this morning to share your views with us.

SCHUMER: Where you from?

LAMB: I work with the OECD [Organization for Economic Cooperation and Development].


QUESTIONER: I was a trade official in the Reagan and first Bush administration. I don’t think you’re a protectionist, and I certainly share your, the objective that you and Senator Graham have. I have two let’s call them quibbles I’d like you to address.

One is that the bill is illegal; that’s it’s not illegal to peg one’s currency. It is illegal to selectively impose a tariff on a trading partner. The other quibble is that this might not work. Given the savings deficiency that we have, not necessarily budget deficits, but trading deficiency—

SCHUMER: Right, right.

QUESTIONER: —we have to do something to curb our voracious appetite for imports. And failing that, could we just be rearranging the deck chairs on the Titanic?

SCHUMER: Okay. Second question means—you know, I think is a more, is a question that gets to me more than the first. The first, you know, well, is it illegal? If your security is at stake, it’s not illegal. We argue that the whole economic security of America and the whole world system which is tied to economics is related to this. And lawyers will make these arguments and all of that. So, I do think the WTO regime needs some re-examining as well. When you’re, if you’re right—I’m not saying you are—if you’re allowed to peg your currency but not have any recourse against it, something’s wrong.

And I also thought, you know, WTO and GATT [the General Agreement on Tariffs and Trade], which I supported, did too little on intellectual property, for instance. It was very good on things that weren’t so good for us, textiles and things like that. But if, you know—and by the way, in terms of my credentials, I lost the AFL-CIO endorsement for six years in Congress because I rounded up the votes—and this wasn’t easy in the late ‘80s—I rounded up the votes to give, stop the override when President Reagan, they were going to impose some kind of big textile tariff that was truly protectionist. And at that point, New York, with apparel and textiles, was pretty big. And five or six of us—Howard Berman [D-Calif.], myself, a few others—stood in the way of that, and I lost the AFL-CIO endorsement. When you’re in the 9th CD in Brooklyn, that’s not so, that’s not an easy thing to do. So you know, I mean, I’ve been on both sides of this issue so to speak. I see, I think I see both sides of this issue.

But in any case, the second one is serious. But first, let me argue this. If, I think it will reduce our trade deficit, but that is not the main thrust of our argument, because you are certainly right. And it’s not just the deficit, it’s not just the government consuming more than it’s bringing in, it’s the country as a whole. I think that the pegging of the currency still exacerbates that problem in certain ways.

But let me make this argument. If China loses and Thailand or Sri Lanka benefits, is that bad? That’s good. So this goes to the heart, and this is, the thing that most bugs me is when free traders, they may disagree with the tactics, it may create a trade war. I don’t agree, my experience says no, and there are liabilities to doing nothing, but that’s different than saying, “Oh, you can’t do anything, you shouldn’t do anything,” and doing something is protectionist when it’s clear the whole thrust of our bill is to increase, is to make the world free-trade regimen work. And again, I’ll say to you not one, and probably more than five, high-level administration officials in various departments have said keep this up because you’re the only thing we got going for us. There is no real belief—

Now, there is a fight within China. The more economic people, whether they’re in the central bank or the finance ministry, realize that China should gradually let its currency float. But they’ve thus far gotten constant resistance from the political regime, who, as I say, I believe is mercantilist.

ROMAN: Okay. There’s a lot of questions. So if we can keep the questions tight. Kim?

QUESTIONER: Kim White, Moore Capital. I wanted to know, you mentioned a type of timetable and tangible steps. What is the timetable? Would the intermediate term, are you looking for a float within three years?


QUESTIONER: And if those steps aren’t met within a time frame, for instance this year, if they’re not prepared to do a 10 percent reval—


QUESTIONER: —what would the punitive steps be?


QUESTIONER: Because your bill calls for 15 to 40 percent reval.

SCHUMER: Yes. Right. Well, I don’t think it’s our job to negotiate the details. That’s between Treasury and the other people in the administration and China. It’s our job to prod them to negotiate. So I guess it would be a little like Potter Stewart on the Supreme Court: you’ll know it when you see it.

We don’t have a set “it has to be done 18 months or our bill is going in to effect” or “their first step has to be 10 percent.” The two criteria we have are tangible steps quickly and a timetable to get the whole way there, not stop at 10 percent, but to get the whole way there in a certain, reasonable amount of time. But I’m not going to put specifics on it because I don’t think that’s appropriate.

And there are probably all kinds of little things going on that I don’t know about. So I think, but I will tell you this. We’ve had discussions with Treasury, with the Fed[eral Reserve] and others, and they try to inform us as to what’s going on.

ROMAN: Okay. Al.

QUESTIONER: Thank you. I’m Albert Keidel, Carnegie Endowment. Until last August I was supervising the China desk in the Department of the Treasury. And I’m really delighted to hear you focus on the global trading system and free trade. And my question is, your assertion that the Chinese exchange rate is out of balance really doesn’t meet the facts.

And I just had a policy brief that came up yesterday. I won’t go into the data, but it’s quite clear, so that China’s trade globally is pretty well-balanced, and the focus on our bilateral trade really is a distraction from what’s important. And so this bill and this demonizing of China, making it a cheater when in fact it’s not supported by the facts, may do more damage to the world trading system and free-trade attitude than anything else.

CHUMER: My answer to the first one is, if it’s not out of balance, then they should let it float and there’ll be none of the discombobulation in China and none of the problems that all those who say don’t do it. If it’s in balance now, float. And I would argue to you even if you’re right, if an imbalance develops later, one way or the other it’ll get self-corrected the way floating currencies work.

As for, we’re not trying to demonize China. And you know, I think that’s a smokescreen-type argument. Anytime you criticize anybody, they say, “You’re demonizing us. Argue on the facts.” You did, but I just disagree with you. But I’d say to you if it’s not out of balance, let it float.

ROMAN: Okay. Steve.

QUESTIONER: Steve Charnovitz, George Washington University Law School. Senator, do you think it’s important the United States follow WTO rules? And if so, are you making a serious argument that imports from China are so dangerous to our national security that that would justify the invocation of the national security statute in the WTO? And if so, then why don’t we take action now? Why wait for two years to protect our national security?

SCHUMER: Well, the second argument is because we have to be practical. I’m a politician. I realize you can’t; the perfect shouldn’t be the enemy of the good, and it would cause discombobulations in China.

As for WTO, as I said, I mean, it’s a work in progress. It’s relatively new, and there are lots of things that people didn’t consider. I’m sure when they originally said that floating currency, that you could peg your currency, they were not thinking of major trading powers. They were thinking of little countries where it, A, didn’t affect the global trading system; and B, they had no choice because they couldn’t control their own economies if big currencies would sort of blow them away.

So the bottom line is yes, WTO needs some changes. But we’re lawyers like anybody else, and we believe that our bill could be very well argued to be within the rules of WTO. And certainly we’re not going to accept the consequences of just, okay you can’t do anything on currency trade, let’s go back to WTO and renegotiate that. That’ll take 15 years, 10 years. And again, what do I tell the people in Marietta? Or better than that, what do I tell the people who don’t know who they are but who would gain jobs because American companies—better, efficient—are being hurt?

ROMAN: Okay. Let’s take a few from the back. Way back there on the right.

QUESTIONER: Hi. Doug Palmer with Reuters News Service. I just wondered, how do you handicap the chances of your bill actually becoming law? I mean, it would also have to go through the House—


QUESTIONER: —as well, and I mean, it would have to be signed by President Bush.

SCHUMER: Oh, okay. And I forgot to do one thing, mention one thing in my opening remarks: our bill is gaining support. What [U.S. Representative] Bill Thomas [R-Calif.] said yesterday was an amazing shot in the arm for our bill, where he basically said that he was open to the House doing something on the China currency situation. And he is a free trader up and down the line as best I know, at least in his tenure as chairman of the Ways and Means Committee.

So what I think ought to happen now is that the president ought to call a little summit and get some of the leaders on both sides of this issue of the House and the Senate together and figure out where to go next. I can tell you, the political support for our bill is very large. But our goal is, frankly, to get the Chinese to, as I said, let their currency float over a period of time, concrete steps, and a timetable.

And so the question really is, as our bill moves through the Senate , and as I said, we’ve been promised a vote before the August recess, and then the House decides to deal with it. It is my strong view that we will get real progress in the ways that I’ve mentioned.

ROMAN: Okay. John?

QUESTIONER: John Makin, Caxton Corporation and American Enterprise Institute. Senator Schumer, currency markets are fickle. What if China responds and lets their currency float—this is a two-part question—and the yuan actually falls in value?

SCHUMER: So be it.

QUESTIONER: Is that okay?

SCHUMER: You bet.

QUESTIONER: Secondly, what if China floats or some pressure is put on China and they revalue and Japan resumes very heavy intervention in the foreign currency market? What would your response be?

SCHUMER: Well, you know, as I said, China; Japan has its own way of interfering with the free floating of currency. They do it in terms of intervention as opposed to an actual peg. But the Japanese are far more part of the world trading system. They’ve been part of it for a longer period of time. And if anything, it’s my view that if the Chinese let their currency float and had a timetable, it would put pressure on Japan to move in a freer direction, not a less-free direction.

ROMAN: Okay. Paula?

QUESTIONER: Thank you. Paula Stern, Senator—

SCHUMER: Hi, Paula.

QUESTIONER: —the Stern Group, Inc. My question is prompted by your suggestion that the president call a summit with the members, the leadership like yourself in this area. Why they haven’t done that yet, because we have had a serious of announcements from the administration that they had been negotiating with the Chinese authorities to encourage them? The president even himself recently in a press conference, in a public statement, made some remarks. Why aren’t they using the Congress kind of tactically, if you will, through the—

SCHUMER: Good question. I agree with the thrust of your question.

QUESTIONER: It’s a rhetorical question.

SCHUMER: That’s why I asked them to—

QUESTIONER: Not really. It’s a practical question.

SCHUMER: Yeah. No that’s why I asked them to create, to call this summit. But this administration, on most areas, and obviously I speak as a Democrat, but one who’s worked with them on a whole lot of areas; I’m far more hawkish, for instance, than most Democrats—they don’t like to talk to people, at least, you know, congressional people, on the other side.

The whole fight on judges, which is a whole different area, is because there’s been virtually no consultation. You know, [Senator] Orrin Hatch [R-Utah] approved [Supreme Court Justices Ruth Bader] Ginsburg and [Stephen] Breyer. They’ve not once picked up the phone and talked to [Senator] Pat Leahy [D-Vt.], who is the Orrin, the equivalent position. So they just haven’t, and I don’t know why they haven’t.

I find [Federal Reserve Board Chairman Alan] Greenspan, who’s regarded as secretive, far more open to discussion—[laughter]—and you know, no, coming to us and talking to us than the Treasury Department.

ROMAN: Okay. Right there.

QUESTIONER: Hi, David Apgar, Corporate Executive Board. Nine-tenths of the value of a bill like this is just getting it out there. The—a

SCHUMER: Well, it’s been out. By the way, and I’m sorry to interrupt you, but our bill has been out there for close to two years. We just didn’t move it at the request of the administration because they said progress could occur. Once they said don’t move it and we said no, and [Treasury Secretary John] Snow, because Snow was on his way to China. And the Chinese then said, he better, before his plane hit the ground, before he even did the handshake and the red carpet and all the other things the diplomats do, the Chinese said he better not bring up currency because we’re not discussing it.

QUESTIONER: And it can also move an administration. I mean, back in the late ‘80s, when [U.S. Senator Bill] Bradley [D-N.J.] put in a bill to threaten to stop the Federal Reserve from sterilizing interventions, the Reagan administration ran the Plaza Accord meeting. But for a second, so I think we’ve actually banked a lot of—especially the—[inaudible] banked a lot of the value of the bill.

But literally, what would we, what should we have China do? I mean, think about it. If China relaxes its currency policy, what’ll happen is the companies in China that are, you know, that are right now under terrific pricing pressure—prices they have to pay internally—that’s why they are doing so well versus Thailand, as you said, these days—they will be much more profitable and be much more formidable competitors.

On the other hand, if the tariffs kick in, that will cut U.S. demand for, essentially, the yuan, and that will be 27.5 percent more competitive yuan that we have to deal with. It seems to me that what we should want, whether it’s through your bill or not, is somehow to stop the Chinese Central Bank, strangely enough, from buying Treasuries. They finance us, but that’s catnip to them. They love it.

SCHUMER: Yes, they do.

QUESTIONER: Those Treasury bills are far more competitive than anything we could possibly produce.


QUESTIONER: So effectively what I guess we need to hope for is that they stop buying treasuries. That at least would expose the imbalances in our own system. And I don’t see what else would make any actual difference.

SCHUMER: Well, look, again, I’m not getting into how they do it. And obviously you’re talking about the same, you know, two sides of the same coin. But you know, I don’t think it’s for us to be in the negotiating phase. I don’t agree with your initial comment that the bill has already done whatever it’s going to do. My experience with the Japan situation, which I mentioned, is the closer the bill got to reality, the more pressure there was on the country to start playing by the rules. And we haven’t even yet passed it in the Senate. So I think we’ve got a ways to go in terms of the value of our bill, even assuming that at some point the Chinese do something, whether it’s stop buying Treasuries, revalue, or whatever else.

ROMAN: Okay. We’ve got another question way in the back.

QUESTIONER: Jessica Mathews, Carnegie Endowment. Senator, I’m not a trade expert by a long shot. But as I listen, I get the sense, especially thinking back to some of the commentary about the EU constitution vote, that what’s happening here is in part a very broad anxiety and anger, politically based in the U.S. and Europe, about globalization. And the Chinese currency rate is something to grab hold of, but it’s actually not the problem. And I wondered whether there’s any, whether you agree with any part of that. And whether, do you see any sense in Congress of a broader way to get at what’s really bothering people?

SCHUMER: Sure. Well, look, you know, globalization is an amazing phenomenon that has really just started. We act like globalization’s been with us for a long period of time, but my view is that technology is what’s created real globalization. The ability that you can have one world labor market, which is the first, that was only created in the last 10 or 15 years for most businesses. Most, you know, most types of production, whether it’s services or even manufacturing. And so this is all brand new. I think it was in 1973 that the total exports and imports of the United States was less than 5 percent of GDP [gross domestic product], and that included oil.

And so we forget that. You know, there’s always been trade, but it’s been far less. And there are going to be all kinds of dislocations that are very difficult. And another reason—this has nothing to do with my bill—that trade is so difficult is we don’t do anything to try and help the workers who are, you know, hurt by this. I have company after company that’s gone out of business because of—and we can’t get them trade assistance, trade-adjustment assistance [TAA]. And if you’re a free trader, you should be for that. But again, this administration on domestic policy has tax cuts over everything else, and that hurts free trade.

You know, and let me tell you, this is not an abstract argument. You go to these factories and they say, “At least get us TAA,” and you see the people there and their families. And we say, “Well, we’ll put you in line, but even though it’s sort of an entitlement, the amount of money in the pipeline won’t ever get to you.”

But the point being that yeah, I think that globalization is very difficult. And short term, it creates all kinds of dislocations that are very painful to a whole lot of people.

And the EU reaction had something to do with that; you know, Eastern Europe, Turkey and all that. It also had to do a little bit with sort of nationalism and losing your national identity, and you’d need some great thinker to tie the two together; you know, to tie two totally different disciplines almost—psychology and economics—together that I’m not, you know, I’m not prepared to talk about.

But I think that you’re right. It does, it does; there is a reaction against it. And what I’m saying is if in the long run this is good, and Alan Greenspan made a great argument to me, by the way. This is on outsourcing. He said, because you worry about outsourcing. And when I hear that a computer programmer at a big New York investment banking firm who makes $150,000 is being laid off and they’re opening up a place in India or China for somebody making 20,000, but here’s what he said, and this is a very compelling argument. He said for every, for the United States for the last five years, 10 years, and 50 years, people who have a college degree or higher, salaries go up anywhere from 8 to 15 percent a year, some high number, which says that supply and demand says that people well-educated, no matter what the outsourcing—at least that’s occurred thus far—are in great demand, whereas people who have a high school diploma, their actual income has gone down over the last several. So what does that say? That says we better improve our educational system.

So you know, the bottom line is there are a lot of ways to deal with this issue, and I believe we’re not. And if I were some of the people here who are either from international corporations, who very much want the free trade—and, really, to them and the obligation to their shareholders, national barriers don’t mean as much as they did even 10 years ago—but also from the academic and particularly you know, the Cato Institute or somebody like that who believe in free trade, where are they pushing for more help through education?

And the bottom line is you need dollars. They can come up with all these little schemes, oh, vouchers or, when your starting salary of a teacher’s $33,000 a year and a quarter of the teachers in this country who teach math are not trained in math, vouchers don’t solve that problem. And so, where is the comprehensive look to deal with the globalization issues, whether it be on immediate things like trade adjustments, you know, TAA, or on education, which is probably the ultimate answer to outsourcing? And I really resent some of the people—this time I’ll be a little political—on the right who are doctrinaire about trade but then tell anyone who’s hurt by it, “tough luck.”

ROMAN: Okay. I think we’re going to take these three questions bundled and then give you the chance to wrap up because—

SCHUMER: Okay. Well do all three together because I do have to leave. We have a markup at 10:00, I mean a hearing.

QUESTIONER: I’m from [inaudible] independent from Chinese government Chinese-language television. I have a question. You mentioned that it’s the Chinese communist regime that refused to play the role of the free market. Right now there’s a big thing happening in China. Two million people start to quit Communist Party from China because of the book “Nine Commentaries on the Communist Party” because that book revealed the true evil of the nature of the Chinese Communist Party. And recently, a delegate from the Chinese embassy in Australia escaped and he also announced, quit Communist Party. So do you think if Chinese people abandon Communist Party, things will go better, the free trade and a lot of things?

ROMAN: Next. Go to your question right here.

SCHUMER: Just hand it to the guy behind you, yeah.

QUESTIONER: Allen Wendt. Senator, you just said, characterizing the people on the right, their attitude of “tough luck.” Now in looking at your bill and the politics of your bill, a large segment of American business is increasingly dependent for its livelihood on imports from China. They would be affected by your bill. Similarly, a lot of Chinese export production derives from American foreign investment. So this really is a double-edged sword. Do these groups make their views known to you? How do they affect the politics of your bill?


ROMAN: Okay. And then one final question, and then—

QUESTIONER: Senator, I know you’re in a hurry so I’ll be real quick. I’m Bob Kapp from the Pacific Northwest. I’ve got a one-man business. We wanted them to peg in ‘98 during the Asian [financial] collapse. We begged them to peg. We gave them great credit, [Treasury] Secretary [Robert] Rubin gave them great credit for holding onto the peg at the time. Sixty-five percent, most people say, of the value of China’s exports to the United States are accounted for by things they buy from Korea, Taiwan, and other places and turn them into final product. So if the renminbi goes up against the dollar and they’re buying all those imports in dollar prices, they’re actually getting their imports cheaper, which cuts into the likely price rise in the things they ship over here.

You made the point that your bill is in a sense the summation of a great deal of wide-ranging American anxiety about lots of things in China right now. And finally, there’s a lot of debate as to whether or not the 27.5 [percent], certainly the 40, even the 15 percent, really, you know, whether it’s really an under-valuation there or not.

So I come out wondering ultimately whether the problem that has led legislators such as yourself and others to look for legislative vehicles is going to be addressed by this at all. In other words, are we really going to save jobs, grow jobs?

SCHUMER: Right. Okay.

QUESTIONER: Or are we involved in an exercise that has a life of it’s own but doesn’t really ultimately—

SCHUMER: Okay. Let me answer all three. First, your question. If you believe as I do that the political regime, whatever its ideology, is standing in the way here, obviously, my view is, if you left this totally up to the economic parts of the Chinese government—central bank, finance ministry—we would have seen progress already. And I have to say that I think the new, I mean, I think [Chinese Prime Minister] Zhu Rongji was more open to this argument than the present leadership of China.

To your question, Mr. Wendt, we hear it somewhat, we do; you know, it will raise the price of goods in Wal-Mart or something like that. My view is if these are the rules, you play by the rules. I do believe America would benefit, but I know that there are certain downsides to it, although I do agree with what Mr. Kapp said, that it may not, you know, there’s a great deal of price pressure in the world because of competition, and you may not get such increases in price. And conversely, you may not get such advantages. Although again, when I talk to companies in New York, whether they be service or manufacturing, they do believe that it would greatly benefit them.

And as for Mr. Kapp’s, he had a whole bunch of different comments and questions. One of them is in what I said to Mr. Keidel, which is let’s see. If it’s not going to change things then fine, then let it float. But then all the arguments against it, the huge discombobulation and everything else, go by the wayside.

I don’t think that he’s right, but who knows? We did talk to a whole lot of economists, currency traders, and everybody else before we did our bill. And as I said, they think it is significant. I don’t think the Chinese would cling to it if they didn’t think it was significant.

But what about all these other problems? And even if our bill was passed, is that going to change? I do think so because I think what it would show the American people is that there’s a way to get fair play, and so far there’s no view of it. And as I said to Nancy at the beginning, my guess is our bill wouldn’t have had the support if on a totally different area, intellectual property, there was a feeling that there was an effort to make real progress as opposed to take what you could.

And so our bill has become the focal point. I would argue it’s the appropriate focal point because it’s not aimed at one industry.

I mean, I for one, you know, the whole textile thing, I don’t think America’s going to be a great textile power [laughter] and that’s not how history works. So I don’t like seeing the trade-off: “Okay, we’ll let the currency sit, but we won’t go through the trade regime in terms of textiles and apparel.” But, so I’d say our bill is the appropriate focal point, but it certainly represents a much broader, broader push behind it.

But I certainly believe that if our bill were to take, have its intended affect, it would relieve pressure elsewhere, mainly because people would get the feeling, okay there was progress in currency, now there can be progress here. And maybe Marietta, little Marietta in Cortland, New York, would actually be able to get some kind of help or relief, or even the Chinese would be less intransigent. Thank you, everybody.

ROMAN: Thank you. [Applause]