Wednesday, March 01, 2006

Just read a very interesting note written by a friend in the banking community on the prospect of passing the Schumer-Graham Bill, which, if passed, would impose a 27.5% tariff on all Chinese import because the Chinese monetary authority is supposedly under-valuing the RMB by 27.5%. There is apparently renewed momentum in Washington to pass this bill.

Of course, this bill is ridiculous from an economic and legal perspective (like, it violates the WTO), but does that mean it doesn't have a chance of becoming law? I wish I can say so with confidence, but in politics, you never know. I presume there is some heavy lobbying in the background against any actual protectionist measures. However, there is likely a free-riding problem. That is, all the small firms investing in China are leaning on the big companies to lobby Congress, but the big players are afraid to damaging their name brand, so they pray that the other big companies will do the lobbying. As a result, you have an under-supply of pro-China lobbying. Meanwhile, politicians who just want the next re-election are individually incentivized to hurl as much protectionist rhetoric to the public as possible.

But what's really crucial is whether there is leadership to actually see this bill through. One thing to look at is whether members in the relevant committees (finance committee, I believe) are running for re-election this time and whether their margin of victory is narrow. Only those with a need of re-election would try to benefit from this mess through shepherding the bill through the legislative process, thereby claiming credit. At minimum, this bill will require both Schumer and Graham's continual commitment; they are incentivized to continue sponsoring the bill since they will get the most credit, as the bill is named after them. But will other members follow suit?

One hopes not. Rhetoric is fine, but actual action will be detrimental because it will create general expectation of uncertainty. And of course, consumers will suffer.

In blogspeak, longtime reader, first-time commentator. Treasury has clearly signaled their opposition to the Schumer-Graham legislation. From what I can tell, the vote on the Schumer-Graham bill will come up within a week of both Treasury's six-month report on whether China is a currency manipulator (signs point to China being named as one in the next report) and Hu Jintao's visit in April. Therefore, Treasury is setting themselves up to be both tough (labeling China as a manipulator) but reasonable (opposing protectionism based on WAG methodology). Treasury will lobby against the bill in the Senate, and I wouldn't be completely surprised if the administration vetoes in the unlikely event of its passage. Who knows, but I think the chance of the bill becoming law is fairly slim.
The chairman of the Senate Finance Committee is Chuck Grassley who is from Iowa. No way is he going to let this pass.

The main determining factor in how a congressman votes on these things is what district they come from. Schumer and Graham are both from textiles states.

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