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U.S. Boosts Pressure on China to Float Currency

By Paul Blustein
Washington Post Staff Writer
Friday, April 15, 2005; Page E01

The Bush administration yesterday stepped up its appeals for China to let its currency rise, as pressure mounted in Congress for tougher action on a host of Chinese practices that allegedly fuel the burgeoning U.S. trade deficit.

John B. Taylor, Treasury undersecretary for international affairs, urged China to let its currency, the yuan, rise according to market forces without further delay because it has taken enough preparatory measures to do so. "We have very much stressed that they can begin to have a flexible exchange rate right now," Taylor said.

Treasury Undersecretary John B. Taylor has increased pressure on China to float the yuan. (Issei Kato -- Reuters)

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Taylor's comments, which came at a briefing for reporters, ratcheted up the pressure a notch on Beijing to end its decade-long policy of keeping the Chinese yuan fixed at a rate of about 8.3 yuan per U.S. dollar. That policy has been attacked by many U.S. manufacturers, labor unions and economists as keeping the value of the yuan too low, thereby giving an unfair competitive edge to Chinese products in world markets. The issue was raised repeatedly at a congressional hearing yesterday during which lawmakers vented their frustration over the migration of U.S. jobs to China and the U.S. deficit with Beijing, which soared to $162 billion in 2004, about one-quarter of the total trade gap.

The administration has drawn sharp criticism for maintaining a strategy of "patient diplomacy" on the currency issue, which opponents contend is enabling Beijing to keep the yuan fixed for the foreseeable future. Taylor and other U.S. officials have exhorted China to move toward floating the yuan while expressing some sympathy for Beijing's concern that it must first shore up and modernize its fragile financial system lest a floating currency cause the system to destabilize.

By asserting that the necessary steps have been taken, Taylor conveyed a new sense of urgency on the matter. His comments came on the eve of a meeting of finance ministers and central bank governors from the Group of Seven major industrial nations, who at their past two gatherings were joined by their Chinese counterparts for a discussion of the yuan issue. The Chinese are not sending representatives to this weekend's meeting, which some experts have interpreted as a sign that Beijing is rejecting pressure from Washington and other capitals. But Taylor disputed that interpretation and said some Chinese policymakers share his view that the yuan could float, although he added, "I can't say that every person in China agrees with that."

Helping to prod the administration have been congressional demands for a more aggressive stance. A bill was introduced last week in the Senate to slap 27.5 percent duties on Chinese imports unless Beijing changes its currency policy, and similar legislation has been proposed by House members. The administration and other opponents object that such an approach would backfire with the Chinese and would violate World Trade Organization rules, but the bill survived an attempt to kill it, by a 67 to 33 procedural vote, forcing Senate leaders to pledge that the bill would be put to a vote in July.

The heat emanating from Capitol Hill was much in evidence at yesterday's hearing of the House Ways and Means Committee on China trade issues. Lawmakers clashed with officials of the administration and the nonpartisan Congressional Budget Office, who argued that many of the accusations hurled at Beijing are misplaced.

The case for a cooler approach to Beijing was advanced by Kristin J. Forbes, a member of the Council of Economic Advisers, who noted that China's rapidly growing market is the fifth-largest in the world for U.S. exports. Although shipments of goods from China to the United States far outstrip the flow in the other direction, Forbes contended that it is a mistake to blame many U.S. job losses on that factor.

Increased imports from China "largely reflect decreased imports of the same goods from other countries," Forbes said. "In fact, much of China's recent increase in U.S. import share has come largely at the expense of Japan," whose share of U.S. imports fell to 8.8 percent in 2004 from 12 percent in 2000, while China's share increased to 13.3 percent from 8.2 percent. Furthermore, she said, "employment in the United States has recovered over the past two years, at the same time that imports from China have continued to increase."

Another administration official, Assistant U.S. Trade Representative Charles W. Freeman III, cited recent steps the administration has taken, such as a move to limit imports of Chinese clothing, which surged in the first quarter of this year after the termination of a global system that regulated worldwide trade in textiles and apparel.

And Douglas Holtz-Eakin, director of the CBO, questioned whether raising the exchange rate of the yuan would do much good in changing trade patterns. That is because many imports identified as Chinese, such as electronic appliances, are only partly made in China, with many of the components and much of the design work produced elsewhere while low-cost Chinese workers perform the manual assembly.

"If the yuan appreciated relative to the dollar, it would directly increase the U.S. price of imports from China," Holtz-Eakin said. "However, those increases would probably be much less than the appreciation of the yuan itself." He noted that one study has estimated that 20 to 30 percent of the value of exported Chinese goods represents the value created in China.

Panel members from both parties derided those arguments as abstractions that do not temper the real-life horror stories they hear from businesses in their districts that have been driven to bankruptcy by Chinese competitors.

"We know [the fixed rate of the yuan] provides a discount for their products in our market," said Rep. Benjamin L. Cardin (D-Md.), the ranking minority member on the panel's trade subcommittee. "We need action. Those who have lost their jobs because of exchange rates or intellectual property piracy -- they can't just say, 'Everything's fine.' So I just want to express the frustration that many members feel."

Rep. Nancy L. Johnson (R-Conn.), who just returned from a trip to China, also blasted Beijing for rampant piracy of U.S. movies, music and software and noted that many U.S. goods face tariffs of 15 percent and more in the Chinese market. Those tariffs are "a crowning insult" to Americans who have lost their jobs due to Chinese practices, she said, and the administration ought to be pressing Beijing to lower them. "We've got to get far more aggressive," she said.

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