WASHINGTON -- A decade ago, or perhaps a little longer, New York Democratic Sen. Chuck Schumer had an epiphany during a visit to a Crucible Industries steel plant in Syracuse.
His realization has proved enduring, and a decade later, it threatens to derail the grand trade agenda of his fellow Democrat, President Barack Obama.
The lightning bolt that lit up Schumer’s imagination that day was delivered by managers at the specialty steel factory, who complained of a surprisingly simple and profound fact that few people ever consider if they don’t deal in international commodities. Steel fabricators in Schumer’s state were losing sales not because of any failing on their part, but because the government of China was using a trick of the international currency market to keep Chinese manufacturers’ goods as much as one-third cheaper.
The label for the practice is currency manipulation, and Schumer has harped on it ever since -- in meetings with business leaders, on the Senate floor, in hearings, and with legislative offerings.
But what exactly is it, and why does does it matter? And why is it so important to many Democrats that if it's not addressed in the ongoing push for massive new trade pacts, they’re willing to torpedo their own president’s agenda?
To Schumer, it became simple back in Syracuse, and he sat down with The Huffington Post to explain why.
Currency markets are supposed to work just like any other. When demand for a currency is high, its price should rise. Because China exports so many products, and Chinese manufacturers are paid in the local yuan currency, it means demand for the yuan is exceptionally high as people around the globe trade in their dollars or pounds on the currency market to buy Chinese goods.
In theory, the price of the yuan should rise along with that demand, while the price of the currencies being sold should go down. There should be an abundance of dollars in currency markets as they are spent to buy yuan, leaving the price of the dollar to fall.
“If you just let it float, it would be how much demand there was for it, versus how much supply,” Schumer said. “But if a government intervenes and puts its thumb on the scale because it has reserves -- and China has more reserves than anybody else -- it can artificially manipulate what that price should be.”
The way that China’s central bank does that is by flooding the market with yuan and buying dollars, making greenbacks scarcer and more expensive. China’s reserves include more than $1 trillion in U.S. dollars. The country also sets limits on trading its currency.
That has a huge impact on American manufacturers because it means that one U.S. dollar buys more Chinese yuan than it rightfully should. And it means that Chinese products that are similar to U.S. versions wind up being much cheaper.
“In effect, what it means is it’s harder for American workers to sell their goods to China and a whole lot easier -- 33 percent -- for China to sell its goods here,” Schumer said.
Under the exchange rate of the last few years, if it costs a Chinese firm a little more than six yuan to produce a certain gizmo, it costs an American $1 to buy it. But if the yuan was allowed to float, and its value rose to around five yuan for $1, for instance, all of a sudden that same gizmo would cost $1.20.
Consumers may not appreciate the price hike. But it also would mean that an American product that used to cost a Chinese consumer six yuan suddenly only costs five. That would allow the United States to sell more things to China, and hire more workers to produce them.
The Economic Policy Institute estimates that because China has only allowed its currency to strengthen modestly, even under international pressure, the United States has lost more than 3 million jobs since China joined the World Trade Organization in 2001. If the currency manipulation ended, the researchers estimate the U.S. could add millions of jobs. Ending China's manipulation also could cut U.S. trade deficits between $200 billion and $500 billion in three years, and add as much as $720 billion annually to the U.S. economy, or nearly 5 percent. It would be an enormous economic stimulus that requires no new spending by the federal government.
The numbers of jobs lost from manipulation, and the flip-side potential gains from ending it, are what make it so important for many lawmakers, on both sides of the aisle. Republicans, such as Sens. Lindsey Graham (S.C.), Susan Collins (Maine) and Jeff Sessions (Ala.), have been strong proponents for legislation that would crack down on currency manipulation.
But for Democrats, many of whom support the goals Obama is striving for in his pursuit of the Trans-Pacific Partnership agreement with 11 Pacific Rim nations, and the Transatlantic Trade and Investment Partnership with Europe, currency manipulation is especially important because many suspect Obama will be unable to enforce the stronger labor and environmental standards called for in those trade deals.
Many have called for tougher enforcement mechanisms before they’ll back Obama’s push for Trade Promotion Authority, a fast-track approval process that lets new trade deals pass easily through Congress with no procedural hurdles and no amendments.
Failing that, enough Democrats still could go along to secure fast-track powers for Obama, if they get a currency bill passed, which may help their constituents even more than purported benefits of the trade pacts, and with greater certainty of success.
But in a sign of just how important currency manipulation is to several countries that would be included Trans-Pacific Partnership, Obama administration officials who testified on Capitol Hill last month almost universally warned that passing currency measures would be a trade-deal killer.
"Seeking enforceable currency provisions would likely derail the conclusion of the TPP, given the deep reservations held by our trading partners," Treasury Secretary Jack Lew told senators.
Schumer has warned the administration that he and many Democrats may oppose the trade deals regardless, even with a currency crackdown included. But without it, Obama will have a hard time finding the 50 Democrats that House Speaker John Boehner (R-Ohio) has estimated he will need to give Obama a marquee victory.
Schumer said he thinks the administration needs to promise not to veto the currency bill that is moving alongside fast-track trade legislation if Obama wants to get the fast-track measure passed. Otherwise, Schumer said, "They’re going to lose a lot of votes on TPA, on the regular trade bill.”
This video was filmed and edited by Christine Conetta and Brad Shannon.
Michael McAuliff covers Congress and politics for The Huffington Post. Talk to him on Facebook.