Congress: getting real on China

Chief Executive, The, April-May, 2006

THE REPUBLICAN-CONTROLLED CONGRESS has taken a nasty protectionist turn. Last year, it blocked the Chinese acquisition of Unocal and it recently blocked a Dubai-based group from acquiring American ports. Both were wrongheaded moves. Senate Banking Chairman Richard Shelby is seeking to compound the damage with a bill that would give Congress even more influence over foreign acquisitions.

But a note of reality may be suddenly appearing. New York Democrat Sen. Charles Schumer and South Carolina Republican Sen. Lindsey Graham had thrreatened to introduce a bill that would impose 27.5 percent tariffs on China's exports to the U.S. unless it sharply revises the value of its currency within two years.

The two of them actually went to China, however, and obviously learned something. They now have dropped their legislation, at least temporarily.

What did they learn? First, the Chinese said they ultimately want to move away from a currency that is completely controlled. The good senators may also have learned that the Chinese are concerned about the stability of their antiquated financial system--any shocks could threaten their social and political stability.

They also may have learned that the Chinese have power. Could it be a complete coincidence that the senators relented at the same time that reports surfaced showing the Chinese hold $853.7 billion in reserves of dollars and other currencies, more than even Japan? Clearly, China is more than a banana republic that can be intimated by senatorial bluster.