(Washington D.C.)- U.S. Rep. Sander Levin (D-MI), Chairman of the House Ways and Means Trade Subcommittee, made the following opening remarks today during the Tripartite Hearing on Currency, "Currency Manipulation and Its Effect of U.S. Businesses and Workers," convening Subcommittees of Ways and Means, Financial Services, and Energy and Commerce:

Currency Manipulation
and Its Effect on U.S. Businesses and Workers

Opening Statement of
U.S. Rep. Sander Levin (D-MI)
Trade Subcommittee, Chairman

Hearing: Subcommittees of
Ways and Means, Financial Services, and Energy and Commerce
May 9, 2007
 
Prepared for Delivery

This is an extraordinary hearing, with at least 68 members of Congress invited to participate, across three subcommittees from three different committees.  And the caliber of the panel before us is extraordinary as well, representing a broad range of views and experiences, and a uniformly high level of intellect and insight across the board.  Thank you all for testifying today.

Even more extraordinary than this hearing is the situation we face today with the Chinese and the Japanese currencies.

In 2006, the U.S. trade deficit was over $232 billion with China and over $88 billion with Japan.  Past and current interventions in the currency markets by the Chinese and Japanese governments are certainly not the sole cause of these trade deficits.  But they are one cause.  I hope today's hearing will shed light on that issue, and on how this Congress should address it.

[China.] On a daily basis, the Government of China intervenes in the foreign exchange markets.  To maintain the fixed exchange rate the Chinese authorities have accumulated massive foreign exchange reserves in the past several years - selling Chinese renminbi (or "RMB") and soaking up foreign currencies to keep the value of the RMB artificially low.  At the end of 2001, China's foreign reserves had grown to $212 billion.  By the end of 2004, they had grown to $610 billion.  By the end of 2005, they had grown to over $800 billion.  And by the end of 2006, they had exceeded $1 trillion.  Today, China's foreign exchange reserves exceed $1.2 trillion - more than any nation has ever held in history.

The result has been that the RMB is undervalued - making China's exports cheaper, and U.S. exports to China more expensive.  Estimates of the extent of the undervaluation range from 10 percent to more than 50 percent.

For at least four years now, the Administration has repeatedly and publicly stressed that China needs to move towards a more flexible market-based exchange rate regime.  In its report for the first half of 2003, the Treasury Department reported that it has "urged" China to move toward greater exchange rate flexibility.  Two years later, Treasury reported that Chinese authorities said they would "enhance the flexibility and strengthen the role of market forces in their managed floating exchange rate regime".  Treasury wrote: "The Chinese authorities should do so by the time this report is next issued."  But China did not do so.  In the following issue of the report, in May 2006, Treasury made the following statement:

This report expresses particular concern about the international economic and exchange rate policies of China and reaches the central conclusion that far too little progress has been made in introducing exchange rate flexibility for the renminbi. ... The delay in introducing additional exchange rate flexibility is unjustified[.] ... Given our strong disappointment and the importance of China to the world economy, the Treasury Department will ... continue actively and frankly to press China to quicken the pace of renminbi flexibility.

But the Administration's strong rhetoric is not matched by its results.  In July 2005, the Government of China announced that it was moving from a "peg" to the U.S. dollar to a "managed float", based on a basket of currencies.  The RMB, on a nominal basis, has since appreciated by seven percent.  In fact, however, on a "real effective" exchange rate basis, the RMB at the end of 2006 had appreciated only 0.2 percent relative to the dollar, compared to its position at the end of 2004.  (The nominal exchange rate does not correct for the rate of inflation, whereas the real exchange rate does.)  In other words, China has made no real progress in appreciating its currency.  The Administration's repeated efforts at "dialogue" have fallen flat.

 [Japan.]  The situation with Japan is also troubling and extraordinary.  The Japanese yen was recently described by The Economist magazine as "perhaps the world's most undervalued currency."  A recent Treasury Department report to Congress notes that "the yen is now at its weakest level in real trade-weighted terms in more than 20 years." 

Nevertheless, the Administration resists calls even to discuss the issue. According to Secretary Paulson, the Government of Japan has not formally intervened in the foreign exchange markets since March 2004.  But the weak yen today reflects the Japanese government's massive interventions several years ago, and Japan's ability and willingness to intervene again if the yen begins to appreciate significantly. The weak yen also reflects monetary and fiscal policies, including setting low interest rates and failing to stimulate consumer demand.  Mr. Rangel, Mr. Dingell, Mr. Frank, and I made this clear in a letter to the Treasury Secretary in February - and The Economist magazine subsequently agreed with our analysis. According to The Economist:

Mr. Paulson is being short-sighted.  Even if Japan is not intervening to hold down its currency, the yen is still misaligned.  A country with one of the world's largest current-account surpluses and low inflation ... should have a much stronger currency. ... Japan does not need such low interest rates or a super-cheap currency any more.  Indeed, Japan's abnormally low rates could be viewed as a form of intervention to hold down the yen.

In short, past and current actions by the Government of Japan are causing a weak yen, holding down prices of imports from Japan, while making U.S. exports in Japan more expensive.  Indeed, the Nikkei Weekly reported in 2005 that Toyota Motors' profit increases by $227 million for every 1 yen that the Japanese currency depreciates against the dollar.

Thus, the situation with both China and Japan is a history of massive government intervention in, or other management of, its markets - a major factor in combined foreign exchange reserves of more than $2 trillion. This kind of activity distorts markets, harming in real terms businesses and working people in the United States. 

I have met with many groups of businesses and workers, from across the United States, who struggle with this every day.  These businesses and workers can compete - and want to compete - against their foreign counterparts.  All they ask is that they be allowed to compete on a level playing field. 

I recently met with a group of synthetic fiber manufacturers.  They are forced to compete against extremely low-priced Asian fibers and yarns.  These lower prices do not reflect lower input costs or more efficient processes.  The U.S. manufacturers buy their raw materials (petroleum-based products) on the same world markets as their Asian competitors, and pay the same prices.  What accounts for the lower prices of their competitors has nothing to do with free markets.  It has everything to do with foreign government interventions, including in the currency markets.  As one industry representative told me, "Just put us on an even footing, and the U.S. will win what it should win."

There is also a growing recognition that China's and Japan's currency behavior is contributing to potentially dangerous global imbalances.  The International Monetary Fund was established at the end of World War II to oversee the global financial system.  Its Managing Director, Rodrigo de Rato, noted recently that other Asian countries are feeling pressure to keep the value of their currencies low, to keep pace with China and Japan.  Some have even questioned whether these imbalances place in jeopardy the functioning of the international financial system as a whole.

In my view, the issue on the table today is not whether the United States needs to take action to respond to the interventionist policies of China and Japan in this key area, but what form that action should take.  I look forward to hearing from our distinguished witnesses, and thank you all again for coming here today.

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