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Market Impact [ UCOOC, Unocal, Red Alert ]
The Center For Security Policy ^ | July 15, 2005 | Frank Gaffney

Posted on 07/15/2005 11:50:21 AM PDT by Paul Ross

Market impact
Friday, July 15, 2005

As reported by Bloomberg News, China National Offshore Oil Corporation (CNOOC) stocks fell following Center for Security Policy President Frank Gaffney's testimony Wednesday before the House Armed Services Committee that called attention to the adverse economic and national security implications of CNOOC's $18.5 billion bid to purchase Unocal.

Gaffney pointed out that the PRC's play for Unocal's energy and rare earth mineral assets is hardly a normal commercial transaction, but rather part of Beijing's long-term plan to dominate strategic energy resources, materials, minerals and technologies in order to provide a civilian economy that will serve China's military needs, observing that "the PRC's aim is inexorably to supplant the United States as the world's premier economic power and, if necessary, to defeat us militarily."

Wednesday's hearing lent substantial momentum to congressional opposition to CNOOC's purchase of Unocal. While the House has already approved a spending measure that would block the Committee on Foreign Investment in the United States (CFIUS) from approving the merger, its support in the Senate is uncertain. Should the Senate fail to direct CFIUS to block the deal, as Gaffney concluded, "we will find ourselves on a collision course with Communist China."

TOPICS: News/Current Events
KEYWORDS: chicoms; china; cnooc; communist; defense; energy; hegemony; magnequench; monopoly; oil; pearlharbor; petroleum; piracy; rareearthmetals; strategic; supermagnets; technology; unocal; walmartnofriend; war
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1 posted on 07/15/2005 11:50:23 AM PDT by Paul Ross
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To: Paul Ross; Southack; Fedora; Calpernia; Lazamataz; Cboldt; Mad Mammoth


2 posted on 07/15/2005 11:54:48 AM PDT by The Spirit Of Allegiance (SAVE THE BRAINFOREST! Boycott the RED Dead Tree Media & NUKE the DNC Class Action Temper Tantrum!)
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To: Blurblogger; Alamo-Girl; Jeff Head; Travis McGee; doug from upland; ALOHA RONNIE; maui_hawaii; ...
President and C.E.O.
Center for Security Policy

13 July 2005


Mr. Chairman, thank you for affording me an opportunity to address the proposed acquisition by an American oil company by one of Communist China’s large state-owned oil corporations. I commend you for your leadership in exploring and informing our Nation’s government and people about the national security implications of this possible transaction.

I would summarize my assessment of those implications as follows: The purchase of Unocal by the China National Offshore Oil Corporation (CNOOC) would have adverse effects on the economic and national security interests of the United States.

Such a conclusion arises from three factors: 1) The folly of abetting Communist China’s effort to acquire more of the world’s relatively finite energy resources. 2) The contribution this purchase would make to the PRC’s efforts to dominate the vital supply of rare earth minerals. And 3) the larger and ominous Chinese strategic plan of which this purchase is emblematic. Permit me to address each of these points in turn.

Energy: The Sine Qua Non of 21 st Century Economic and Military Power

At the risk of stating the obvious, no nation can afford its people the quality of life, let alone the economic and security benefits, associated with being an advanced 21 st Century society without assured and cost-effective access to energy. Today, for the United States and most of the rest of the world – including, increasingly, Communist China – that means having access to reliable sources of imported oil. China is mindful of the lessons of the 20 th Century with respect to energy insecurity. Imperial Japan’s thirst for imported oil was a principal catalyst for its war with the United States. For the moment, the PRC is neither able nor willing to emulate the violent seizure by Japan some sixty-four years ago of petroleum and other natural resources in East Asia. We ignore at our peril, however, the fact that Beijing is engaged in an even-more-ambitious effort to acquire legal title to energy resources, not only in theWestern Pacific – where much of Unocal’s reserves of 650 million barrels of oil are to be Western Pacific – where much of Unocal’s reserves of 650 million barrels of oil are to be found – but literally around the world.

What is particularly worrisome is that Chinese deals being struck from Siberia to Venezuela, from Indonesia to Sudan, from Iran to Canada, from Azerbaijan to Cuba appear not only designed to secure oil to meet Chinese needs. In a world in which such resources are certainly finite, and possibly contracting, they also have the effect of taking them off a global market upon which the United States is increasingly dependent.

As you and Rep. Bartlett know, Mr. Chairman, Jim Woolsey, Bud McFarlane, Boyden Gray and a number of other national security-minded individuals and organizations have joined the Center for Security Policy in advancing a plan for energy security we call the “Set America Free” blueprint. (The blueprint can be viewed at It offers practical steps that can be taken immediately to begin reducing the Nation’s need for imported oil. Unless such steps are taken, it would appear that, as a practical matter, we will inevitably find ourselves on a collision course with Communist China, particularly if world-wide demand for oil approaches anything like the projected 60% growth over the next two decades. As I will discuss in a moment, such a Sino-American conflict may be unavoidable even if we have substantially weaned our economy from its present dependence on foreign energy. It certainly behooves us in the meantime, however, to preserve, wherever possible, for our own use domestic and offshore oil reserves owned by American companies and others to which we have reliable access.

Unocal: The Last American Source of Rare Earth Minerals

A second cause of concern about a Chinese purchase of Unocal involves assets other than the latter’s oil reserves. The Unocal-owned Molycorp mine in Mountain Pass, California is America’s only indigenous source of rare earth minerals known as lanthanides, including neodynium.

In 1999, the Select Committee on U.S. National Security and Military/Commer-cial Concerns with the People's Republic of China released what came to be known as the “Cox Report.” Noting that the “main aim for the civilian economy [in China] is to support the building of modern military weapons and to support the aims of the People's Liberation Army (PLA),” the Cox Report determined that “rare-earth metals” and “special-function materials” are considered by the Chinese to be “exotic materials” that are “the key areas of military concern.” As a result, the applications of such materials have been for some time the focus of intensive intelligence collection and technology theft by the PRC.

An October 16, 2002 article in Insight Magazine described how China stole one of the most promising military applications of metals derived from rare earth minerals – a product developed at considerable expense for the U.S. Navy, called Terfenol-D.

According to Insight, the Chinese company that is now marketing a comparable product has claimed that, when used in underwater sonar, this material "brought up the best quality ever with the detection range that can reach as far as 10,000 [kilometers, or 6,200 miles] and when applied to aircraft, this smart material makes a smart wing, which can be controlled much faster with enhanced reliability."

Subsequently, in a March 6, 2003 article, Insight reported on how Chinese “princelings” – relatives of senior civilian and military leaders – had purchased an American manufacturer of rare earth magnets, Magnequench, and thus obtained critical technology now being used to produce “neodymium-iron-boron magnets for servos used in U.S. guided missiles and smart bombs.”

The 2003 article noted that “the PRC acquisition of the rare-earth-magnet technology was part of a long-term campaign initiated by Deng Xiaoping, who ruled the PRC from 1978 until his death in 1997. In 1992, Deng acknowledged the value of the PRC rare-earth reserves in the Baotou region, saying, ‘There is oil in the Middle East; there is rare earth in China.’”

Particularly relevant to today’s topic are documents cited by Insight from China’s Baotou National Rare Earth Hi-Tech Mine – the principal alternative to rare earth minerals from the Molycorp mine – which reportedly declared: The reason why rare earth, a small industry with annual consumption of only 75,000 tons REO [rare-earth oxides] and a market value below U.S. $100 million, has been given attention by Chinese leaders at all levels is due to its uses in modern high-tech industries because of its special chemical and physical properties. As a matter of fact, rare earth has been listed in the category of strategic elements in many countries, such as the U.S.A. and Japan.

I would ask the Committee’s indulgence to quote from this article at some length insofar as it summarizes very well the problem we currently confront in the rare earth mineral arena – a problem that would be greatly exacerbated if China were to own the Molycorp mine:

"Critics say the Chinese plan is transparent. While the PRC was engaged in high-level technological acquisitions to obtain the related technology and machine tools that make permanent rare-earth magnets, a U.S. company mining the raw materials for the magnets was about to be closed. Until 1998, there were essentially two active mines in the world producing rare earths for the exotic magnets – the PRC's Baotou mine and an American-owned mining operation in the Mojave Desert. The tiny town of Mountain Pass, Calif., was home of the Molycorp mine from which experts say the highest-grade rare earths in the world came.

In 1996, the vital Molycorp mine was accused by the Bureau of Land Management of running afoul of regulations to protect the desert-tortoise habitat.

After paying a series of fines and spending a fortune to jigger its mining so as to accommodate protectors of the desert tortoise, the company that supplied almost China’s plans also extend to securing influence in and, if possible, control over China’s plans also extend to securing influence in and, if possible, control over strategic choke points and regions. The latter include not only the Far East, but Africa, the Middle East, Siberia, Central Asia and Latin America. I believe the PRC’s aim is inexorably to supplant the United States as the world’s premier economic power and, if necessary, to defeat us militarily. As members of this Committee know, the Chinese have long told their party cadre and military leaders that war with the United States is “inevitable.” While they are clearly preparing for such a war, the strategy they are pursuing appears designed, in keeping with Sun Tsu’s dictum, to win without having to fight.

Powering all this, of course, is the immense wealth China is accumulating by dint of its many years of trade surpluses. It is an irony not lost on the Communist Chinese that they have done Lenin’s putative dictum one better: We are paying for the rope they will use to hang us. In addition to our money coming back in the form of weapons designed to kill Americans, it is being used to: secure immense leverage over our policies (not least, in the form of holding U.S. debt instruments); buy up what is left of this country’s productive and competitive industrial capacity and other irreplaceable assets; and close off regions of the world to U.S. influence and counter-moves.


In light of the comprehensiveness and zero-sum nature – not to say audacity – of Communist China’s strategy, it is imperative that the United States utilizes a far more rigorous, transparent and national security-minded process for evaluating Chinese investments like CNOOC’s proposed purchase of Unocal. The existing Committee on Foreign Investment in the United States (CFIUS) is clearly wholly inadequate to the task. Having the Treasury Department – whose job it is to promote foreign investment in the United States – charged with evaluating such investments is a formula for precisely what we have seen to date: rubber stamp approval of virtually every transaction, with no regard for the long-term or cumulative impact they will have on U.S. national security equities.

It does not help that the CFIUS process is a completely unaccountable “black-box” operation. I commend my friends and colleagues, Dick D’Amato and Roger Robinson, the Chairman and Vice-Chairman, respectively of the U.S.-China Economic and Security Review Commission, for their leadership in recommending sweeping statutory changes in the configuration and workings of the Committee on Foreign Investment in the United States. It is past time for the United States to have a mechanism that is charged with thinking as strategically as the Chinese do about transactions that could constitute real problems for American security, to say nothing of economic interests.

A ‘Second Opinion’ on China

Before closing, Mr. Chairman, I would like to make one further observation about the context of this hearing. The importance of the U.S.-China Economic and Security Review Commission in providing an all-source-informed “second opinion” on the PRC is all the more vital in light of the serious dysfunctionality that afflicts most other official U.S. government work on this topic.

That dysfunctionality should hardly be a surprise given the following factors:

• Many American businesses are convinced that shilling for Beijing will improve their prospects for a piece of the ever-illusive “China market.”
• Individuals currently serving in influential posts like John Langdon, the current chairman of the President’s Foreign Intelligence Advisory Board, and William Reinsch, a member of Mr. D’Amato’s Commission, who – as lobbyists – have profound conflicts of interest on China.
• Many others who previously held Cabinet and sub-Cabinet posts, but who remain influential in government circles, are similarly compromised.
• The Congress and the American people are denied the unvarnished truth about China’s activities as official testimony is dumbed down and a statutorily mandated annual report on the PLA is subjected to the same treatment and delayed, seemingly indefinitely, lest it prove (properly) alarming.
• Meanwhile, the new Director of National Intelligence has entrusted oversight of U.S. intelligence analysis to individuals like the Foreign Service’s Thomas Fingar and DIA’s Lonnie Henley known for their “see-no-evil” attitude with respect to China.

This is a formula for “group think” and a strategic failure of intelligence that could make anything we experienced before or since 9/11 pale by comparison.

Speaking of Energy

No testimony by me before this Committee would be complete without a word of thanks to you, Mr. Chairman and to your colleagues – especially Congressmen Bartlett and Weldon – for your work on the danger posed to our nation and way of life by the threat of electro-magnetic pulse (EMP) attacks.

Thanks to your efforts, the expert EMP Threat Commission was established by law and charged with conducting a detailed assessment of the effects of a nuclear attack on the United States involving the detonation high above the Nation of a ballistic missile-delivered, EMP-optimized weapon. As you know, the panel concluded that the EMP effects of a detonation at altitudes between 40 and 400 miles above this country could so severely disrupt, both directly and indirectly, electronics and electrical systems as to create a "damage level…sufficient to be catastrophic to the Nation." Worse yet, the commission concluded that "our current vulnerability invites attack." (You have rendered a real public service by making the executive summary of this classified report available at 07-22emp.pdf)

As China is one of the potential adversaries who understands our nation’s acute vulnerability to such attacks, I urge members of this Committee to ensure that the findings of the blue-ribbon Commission on the EMP Threat, that you did so much to make possible, are presented to the full House with a view to implementing as quickly as possible that Commission’s many important recommendations

Thank you, Mr. Chairman.

3 posted on 07/15/2005 12:22:46 PM PDT by Paul Ross (George Patton: "I hate to have to fight for the same ground twice.")
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To: Paul Ross

That Molycorp mines explains, IMHO, the real reason they want to buy UNOCAL.

4 posted on 07/15/2005 2:00:24 PM PDT by GOP_1900AD (Stomping on "PC," destroying the Left, and smoking out faux "conservatives" - Take Back The GOP!)
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To: GOP_1900AD; joanie-f
Well, its as least as big a factor. It's a "twofer" for them.

You have seen where they have been sending over oil exploration and drilling teams to Colorado? They likely will suddenly send over their own miners and extract the best veins of ore...and export it to their country safely under their control.

5 posted on 07/15/2005 2:48:49 PM PDT by Paul Ross (George Patton: "I hate to have to fight for the same ground twice.")
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To: Paul Ross

Thanks for the ping!

6 posted on 07/15/2005 8:33:12 PM PDT by Alamo-Girl
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To: Alamo-Girl; GOP_1900AD; All; Cato; Jeff Head; Travis McGee; doug from upland; LowCountryJoe; ...
Question to be posed to all of those still fence-sitting on these moves by China. Why hasn't Japan, Singapore, South Korea, or any other nation over-loaded with U.S. currency snapped up U.S. oil companies? Or why didn't they outbid and use corrupt bribery to obtain the Panama Canal Leases?

Answer: There was not a good enough business case for them. Hence, what China is doing is not about "business" per se. Which should, if someone is a believer in pure economic determinism...make even a died-in-the-wool laissez faire idealogue detect something fishy. China is locking up strategic resources for power and the ability to leverage it, and deprive it from the U.S...but most expressly to undermine our national defense when we need these essentials.

Political Update on proposal:

U.S. Lawmaker Vows to Block Chinese Bid to Buy Unocal
Defense News, 07/14/05

A key U.S. lawmaker vowed to stop China National Offshore Oil Corporation (CNOOC) from buying Unocal even if the U.S. company’s shareholders accept the bid.

“I think this transaction should not be allowed to go forward,” Rep. Duncan Hunter, R-Calif., chairman of the House Armed Services Committee, said July 13 on the sidelines of a sometimes charged hearing, where a witness who favored the deal and those opposed it clashed. “I think this is viewed by China as a strategic acquisition, not [just] an economic investment.”

Asked if he would block the deal even if the proposal passes review by an interagency U.S. government committee that vets all major foreign acquisitions of American companies, Hunter said he would.

“I think it’s a mistake for the United States to allow this to go forward,” he said. “We’re looking at all options to weigh in on the transaction.”

The Committee on Foreign Investment in the United States (CFIUS) — chaired by the U.S. Treasury Department [ i.e., Secretary John Snowe ] and including representatives from the departments of Justice, Defense, State, Homeland Security and Commerce [Secretary Carlos M. Gutierrez ] — would examine CNOOC’s bid if Unocal shareholders opt to accept the Beijing-based firm’s offer of $18.5 billion. [UPDATE:] The shareholders already have rejected Chevron’s $16.5 billion offer.

Hunter said CNOOC, a firm that is 70 percent owned by the Chinese government, could continue to bid up its offer for Unocal. “I think it’s a very real possibility that China would pay whatever it takes to secure Unocal and its assets,” he said.

The House Armed Services committee’s hearing into CNOOC’s bid for Unocal, based in El Segundo, Calif., was a rare one for the committee, which usually focuses on U.S. national security policies. But Hunter, Rep. Curt Weldon, R-Pa., and witnesses — including Jim Woolsey, former head of the CIA and now a partner at the consulting firm of Booz Allen Hamilton, and Frank Gaffney, president of the Center for Security Policy, a Washington advocacy organization — argued that China’s bid to buy an American oil company must be viewed as a strategic and national security issue.

“The simple fact is that energy is a strategic commodity,” Hunter said in his opening remarks. “China’s purchase of Unocal would dramatically increase” Beijing’s influence in countries ranging from Central Asia to Southeast Asia, where Unocal has oil and gas interests.

Woolsey said CNOOC’s proposal was not a routine takeover of one company by another, but a “takeover attempt by a dictatorial regime.” While the United States should encourage Beijing to open its markets and promote economic freedom, Washington should do more to promote democratic reform and human rights in China, he said.

Gaffney, a former Pentagon official, said CNOOC’s bid for Unocal is part of a long-term strategy by Beijing which fits a pattern of “activity around the globe that is clearly deliberate, well thought-out and ominous in its implications.”

Beijing is steadily building its influence worldwide with the aim to supplant “the United States as the world’s premier economic power, and if necessary, defeat us militarily.”

Jerry Taylor, an oil economist at the Cato Institute, a libertarian think tank in Washington, said the committee’s and his fellow panelists’ fears were “ill-founded.”

Unocal’s global operations add up to only 0.23 percent of the world’s oil production, Taylor said. “CNOOC would not gain any real market power in world oil markets were it to acquire Unocal.”



Just when Cato, without any loss of face or ideological support, could have stood up and shown they are American, and care about America, what does CATO do?

The proverbial, and irrefutable 'Smoking Gun'. CATO is beyond redemption. Totally bent obsessively upon its mono-maniacal agenda, in complete disregard...and denial... of national security reality.

Notice how Cato's Jerry Taylor bloviates about fears being unfounded, nonsensically braying about World Markets (Markets which can shift with lightning speed in a war) without considering how China has locked up the Iranian supply, and is cozying up to Venezuela [Ceasar Chavez]...a kindred band of merry Marxists who would love to cut the U.S. down to size... They have the largest proven reserves in the Western Hemisphere.

We have to start calling all the Free Republic Cato-members out.

Look at the above. There can be NO EXCUSE for endangering the supplies of not just energy, but the precious rare-earths necessary for critical super-magnets and metals (Terfenol-D)

CATO = "Quisling".

E.g., Treason

7 posted on 07/16/2005 6:23:39 AM PDT by Paul Ross (George Patton: "I hate to have to fight for the same ground twice.")
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To: GOP_1900AD; Alamo-Girl; kattracks; joanie-f; ALOHA RONNIE; JohnHuang2; doug from upland; ...
Do you remember way back about four-to-five years ago when we first rang the warning bell about Magnequench, and how it was critical to national security? And how the Unocal rare-earth mines for the Lanthanides...the greatest and best proven reserve of these preciouse ores and materials known on the planet...was shut down by the California Ecological-Wackos, despite everything Unocal could do?

Do you remember how we had some charachter pop up on the thread, saying there was nothing to worry about, and stridently and falsely claiming Unocal's mines were still open and in full production? He was rather adamant too. Wonder what his axe-grinding was really based on...

Oh well, for the moment, the ores are still there. Until China gets ahold of them.

I fear "The fix" might be in, however. Witness the GOP-connected law firm. Doubt that was China's own idea...but somebody over at the Commerce Dept...or Treasury. If CNOOC gets past Congress, clearly the Administration is not going to blow the whistle. I bet that Bejing will successfully bribe...and 'persuade'... their way past the California Eco-Wackos and get the ore shipped to China as fast as it can possibly be dug out.

8 posted on 07/16/2005 6:41:34 AM PDT by Paul Ross (George Patton: "I hate to have to fight for the same ground twice.")
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To: Paul Ross

Thanks for the ping!

9 posted on 07/16/2005 7:24:07 AM PDT by Alamo-Girl
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To: Paul Ross

I wonder who will be the first armchair free trader that will post a coment this guy does not know what he is talking about?? That we are in a new global economy.

10 posted on 07/16/2005 8:37:55 AM PDT by superiorslots (Free Traitors are communist China's modern day "Useful Idiots")
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To: Brilliant

Thought you might be interested in this.

11 posted on 07/16/2005 8:45:43 AM PDT by Czar (StillFedUptotheTeeth@Washington)
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To: Czar

There is no shortage of opinions on this. On the other hand, the prevalence of opinions does not seem to guarantee good policy. For 225 years, we've let the markets make these decisions. I think it's foolish to now abandon that successful strategy and pretend that politicians know better.

12 posted on 07/16/2005 9:45:49 AM PDT by Brilliant
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To: Brilliant
For 225 years, we've let the markets make these decisions. I think it's foolish to now abandon that successful strategy."Then you will agree that "it's foolish" that all of the phony free trade lobbyists are defending China's unilaterally rigging the market with its currency peg, as they are in violation of "225 years of history".

The internal contradictions and conundrum of these lobbyists was recently observed caustically by a well-known economist as follows:

Hey, Buddy, Yuan a Fight?

Dr. Peter Morici has iconoclastic views on Asian currency. It's about time someone spoke up for North American manufacturing.

by Richard Walker

The United States is running the biggest trade deficit in its history —or anyone else's history, come to that. It is buying more goods from the world than it is selling back, to the tune of more than $600 billion a year. And quarter by quarter, the deficit widens. So why is that?

Peter Morici, a professor of business at the University of Maryland and the former director of economics in the U.S. International Trade Commission, thinks he knows the answer. In one word: China. For Professor Morici, China is not just the world's fastest developing industrial power, the coming economic hyper power and the emblem of the transformation of Asia. China, says Morici, is also suppressing U.S. economic growth, limiting U.S. employment and driving not only the trade deficit, but the U.S. budget deficit, too.

"The relationship with China is becoming ever more detrimental to the United States," Morici says. "China is practicing a form of economic imperialism."

But this is an unconventional imperialism, argues Morici, because China's weapon of choice is its currency, the yuan. For a decade, the Chinese currency has been pegged at a steady rate of exchange to the U.S. dollar, so that one dollar always buys 8.28 yuan. But that, argues Morici in a recent paper entitled "Currency Manipulation and Free Trade," is way below the exchange rate that the market would set. He believes that the yuan should be worth much more, and that its current strength is placing U.S. exporters at an intolerable disadvantage. The cheap yuan fuels the U.S. trade deficit, as a cheap yuan means cheap Chinese textiles and plastics, mobile phones and computers.

China maintains the value of the yuan against the dollar as a matter of policy. The Chinese government suppresses the value of its own currency by purchasing U.S. dollars in the domestic Chinese market, and then it recycles those official holdings back into U.S. government securities—one reason the U.S. government is able to run such a large and growing budget deficit. Indeed, while many economists think that U.S. government spending is helping to swell the trade deficit, Morici argues that things actually work the other way around. "You have to understand this can work both ways," he says. "Budget deficits can drive trade deficits. But trade deficits can also drive budget deficits—and that is what's happening, thanks to cheap Asian currencies."

It is not just China, either. Morici says that other Asian currencies are also too cheap. South Korea and Taiwan also need to hold down their currencies to maintain their competitiveness with China. So even though the yen has gained about 4% against the dollar since last fall, the won has risen by almost 12% over the same period, and the Singapore and Taiwanese dollars are at their highest for six and three years respectively, China is the key to the problem, he says. "It's like your grandmother told you—you've got to knock down the biggest bully in the playground, then everyone else will leave you alone."

The Morici argument is contentious, and it goes to the heart of a disagreement about how to understand what everyone agrees is a massive financial imbalance in the world. The economic consensus is that the trade deficit is the byproduct of very low household saving in the United States, tax cuts, excessive stimulation by the Federal Reserve and massive government over borrowing. But are Asian competitors using artificially cheap currencies to build their economies at the expense of U.S. jobs? Or is it the other way around, as commentators like Ronald McKinnon at Stanford University have argued—that the United States is using the status of the dollar as the world's reserve currency to finance its own spending boom?

Is the yuan undervalued?

The arguments start with the central proposition—the idea that the yuan is undervalued. But is it? China's current exchange rate has not stopped it importing almost as much as it exports. Although Chinese trade accounts for about a quarter of the U.S. trade deficit, on a global basis China has a relatively small surplus ($32 billion last year). The Chinese can point to the fact that according to their figures, their foreign trade is almost in balance as a marker of the fair value of the yuan, at least on a global basis. However, competent authorities suspect that Chinese-sourced historical data is not entirely reliable, although it is improving fast thanks in part to World Trade Organization compliance efforts.

Nevertheless, a country with an economy growing as rapidly as China should, in principle, experience a rising currency. There is little doubt that if China maintained its capital controls but moderated its official buying of dollars, moving to a wider currency trading range, or pegging the yuan to a mixed basket of trading partner currencies, then the Chinese currency would begin to appreciate against the dollar. By how much is a guess. Morici says the yuan should be at about five to the dollar, a revaluation of nearly 40%. Others, like Morris Goldstein at the Institute for International Economics in Washington, D.C., reckon that a market rate for the yuan would revalue the currency less than that, by around 15%. Eswar Prasad of the IMF recently published a paper arguing that it is impossible to know if the yuan is undervalued or overvalued— there is no convincing evidence either way, he believes.

Would revaluation cut the U.S. trade deficit?

Whether any revaluation in the 15% range would have the desired effect of greatly shrinking the U.S. deficit and improving U.S. employment growth is hotly debated. Morici concludes that a rising, unpegged yuan would cut the U.S. deficit in half. Others disagree. Economist Laurence Lau of Stanford, for example, has argued that the relatively low share of Chinese value-added in Chinese exports to the U.S. means that a revalued yuan will not make much of a difference to Chinese export prices—although it might well disproportionately advantage U.S. exporters to China, who are less reliant on input prices in currencies other than their own.

And there is another side to the currency argument. China is growing fast thanks to foreign direct investment, much of it from the United States. Indeed, says Stephen Roach, chief economist at Morgan Stanley, the idea that a yuan revaluation will profit U.S. industry overall is plain wrong. Roach says two- thirds of China's export growth in the last decade is attributable to foreign direct investment, and a fall in the profitability of this investment through currency appreciation could also mean a fall in returns from many U.S. companies with cross-border operations. In other words, for every lobby against the low yuan, there is likely to be another lobby in favor.

? Is China growing at U.S. expense?

The complexities of this globalized economy, where a loss of Chinese currency competitiveness may turn into a loss of profitability for U.S. companies, points up a fundamental issue in the dispute. Is the economy of China growing at the expense of U.S. jobs and GDP? Or is the relationship more symbiotic? Robert H. McGuckin, the head of economic research at The Conference Board, believes in mutual advantage. "The fact is that the global productivity wave is making everybody richer," he says.

Morici is having none of that. He believes that a revaluation of the yuan would translate directly into a GDP boost for the United States of $500 billion and as many as 5 million additional U.S. jobs. But he also thinks that it would take some very tough talking to achieve a market rate for the yuan.

Will we revoke Most Favored Nation status?

"We have run out of positive incentives for China," Morici says. "Now we have to insist on a currency agreement. We should sit China down and say that if the yuan is not floated within a period of say three years, then we can't go forward on the current basis. We can't continue trading on a Most Favored Nation basis."

In other words, he favors breaking up the political consensus that has allowed China to develop and reform at its own chosen pace. Will that consensus be broken? In fact, the professor doubts it. "No," he says, "I don't think the United States is actually going to do a great deal. I don't think this administration gets it. It doesn't recognize that free trade in goods requires free trade in currencies."

13 posted on 07/16/2005 10:54:38 AM PDT by Paul Ross (George Patton: "I hate to have to fight for the same ground twice.")
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To: Paul Ross

Yeah, I agree it's foolish, although for the most part, when this happens, it's the rigger who gets burned, not the riggee.

It's interesting that a few weeks ago, I was involved in a thread discussing with fellow Freepers the question of whether we need a more aggressive energy policy. For the most part, Freepers think that there is no oil shortage, and there are vast quantities of untapped reserves. A few posters argued that in fact, more oil is being made every day by nature. When I suggested that oil is an exhaustible resource, and will eventually be exhausted, so we should develop a more aggressive energy policy, I was attacked mercilously by posters who insisted that it won't happen, as is amply demonstrated by the fact that the experts have been predicting that for decades and it has not happened.

Now, however, China tries to buy a few hundred barrels of our oil, and the posters go hysterical, make a complete reversal of the argument they made just a week or two ago, claiming that every drop of oil is precious, and we should not sell even one drop of this ever more scarce resource to China, or we will soon have none.

I'm still trying to figure out which of these completely opposite universes we really live in.

14 posted on 07/16/2005 12:47:59 PM PDT by Brilliant
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To: Brilliant
Unocal is not just a few hundred barrels of oil, but the fifth largest oil company in the US, and it also the owner of the most valuable potential rare-earth mine for lanthanides in the Mojave desert. China will lock up ownership of the lanthanide supply if they can swing this deal.

And as for the currency "rigger" getting burned, wee'll see. Even globalist lefties who have been leading the free trade charge...such as the noisesome Schumer, have been pushing for a correction in China's peg, making the equivalent of a 'feint' in the direction of tariffing if they don't abide with his Graham-Schumer bill.

I didn't see any good quotes from 'gooey' Graham , and I despise Schumer, but his discussion in front of the Council on Foreign Relations (yep, the CFR) should be studied by all sides on the issue:

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

Speaker: Charles Schumer, U.S. Senate (D-N.Y.)

Presider: Nancy Roman, vice president and director, Washington Program, Council on Foreign Relations

Council on Foreign Relations
Washington, DC
June 8, 2005

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]

15 posted on 07/16/2005 1:07:30 PM PDT by Paul Ross (George Patton: "I hate to have to fight for the same ground twice.")
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To: Paul Ross

China doesn't care about the rare earth. It wants the oil. You can easily tell them they've got to divest themselves of that before they can sell.

16 posted on 07/16/2005 3:23:30 PM PDT by Brilliant
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To: Paul Ross
Unocal’s global operations add up to only 0.23 percent of the world’s oil production, Taylor said. “CNOOC would not gain any real market power in world oil markets were it to acquire Unocal.”

"Less than one percent! Should I become a scared little bitch, too?" ~ A run-of-the-mill 'traitor' who believes in private property, capitalism, and America's continued greatness even though he's accused of being treasonous.

17 posted on 07/17/2005 12:20:52 PM PDT by LowCountryJoe (50 states, and their various laws, will serve 'we, the people' better than just one LARGE state can)
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To: superiorslots
I wonder who will be the first armchair free trader that will post a coment this guy does not know what he is talking about??

DING! DING! DING! We have a winner for the "ARNOLD" AWARD.

Well we have our answer to your question, the first to rush in, and without a scintilla of reality-checking....the envelope please... the self-admitted traitor, lowcountryjoe.

He Accepts the bogus numerical assertions of Taylor, hook, line and sinker...without a scintilla of critical evaluation or reflection on the fact that prices show clear and convincing levels of friction in supply, forcing it up the supply-price curve.

And what does this move by China portend increasing their proven reserves 80%...and the ominous potential of diversionarily reducing the U.S.'s? The answer is obvious.

The Chi-coms already don't let us buy up THEIR oil concerns...why should that be so if they are really into free trade?

But they want us to acquiesce without a peep, as they hypocritically insist on the right to buy up ours....

This brazen hypocrisy alone should signal us that this offer is NOT on the level, and all Chinese reassurances should be completely discounted. The chances of the oil staying liquid, and globally available, are likely phony...i.e., BUTTKUS... even in normal circumstances, let alone if the balloon goes up... The clear risk is these supplies will be diverted from the U.S. market which is already manifesting evidence of stress as shown by prices.

The real experts in this are not the economists, but the security analysts. And clearly, China is "not a market economy -- that's the real challenge we have here," said Michael R. Wessel, a member of the U.S.-China Economic and Security Review Commission, a group established by Congress. "They see resource acquisition as an integral part of their military plans. We need to look at it on the same basis."

Gal Luft, executive director of the Institute for the Analysis of Global Security, said that to the extent China acquires reserves from countries such as Canada, "It means we will be more dependent on the Middle East and other more unstable areas." As a result, "this deal should be viewed as a red flag.

18 posted on 07/17/2005 7:04:35 PM PDT by Paul Ross (George Patton: "I hate to have to fight for the same ground twice.")
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To: Paul Ross

What I'm really surprised about is the fact that you did not report me to the having such thin skin and all.

19 posted on 07/18/2005 3:11:02 AM PDT by LowCountryJoe (50 states, and their various laws, will serve 'we, the people' better than just one LARGE state can)
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To: LowCountryJoe

You are more useful as the in-your-face commie troll you are.

20 posted on 07/18/2005 6:29:27 AM PDT by Paul Ross (George Patton: "I hate to have to fight for the same ground twice.")
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