Putting Pressure On China's Peg

Typically, Chinese exports -- such as DVD players, clothing and auto parts -- contain many components and raw materials that come from other countries; the value added in China often involves low-cost assembly and other labor-intensive work. In testimony at a congressional hearing last month, Douglas J. Holtz-Eakin, director of the nonpartisan Congressional Budget Offices, cited research indicating that China contributes only about 20 to 30 percent of the value of the average product that it ships abroad.

Thus, Holtz-Eakin said, even though a rise in the yuan would increase the price of Chinese imports, "those increases would probably be much less than the appreciation of the yuan itself." For example, if the yuan rose 20 percent -- a significant appreciation -- the increase in the price of Chinese imports would probably average only about 4 to 6 percent, Holtz-Eakin said.

Among the companies with the greatest grounds for grievance are U.S. makers of furniture and metal products, said Franklin J. Vargo, vice president for international economic affairs at the National Association of Manufacturers. Their Chinese competitors make most of their product in China.

Even if Chinese imports do rise in price and the United States buys fewer of them, that will not necessarily help shrink the U.S. trade deficit or save U.S. jobs, because imports from other countries may simply fill the gap left by China.

Consider the computer and electronics industry: Imports of computers and other electronics from China have soared in the past several years, with the Chinese share of the market rising from 4.3 percent in 2000 to 11.1 percent in 2004. But as Holtz-Eakin noted in his testimony, imports' overall share of the market stayed roughly the same. The obvious implication, he said: "Imports from China were largely replacing imports from other sources."

Still, the momentum in Washington is clearly in favor of turning the screws on Beijing over the currency issue. The administration's change in tactics is especially striking.

A year ago, when controversy over the issue was starting to erupt during the presidential campaign, the White House rejected calls from Congress and industry groups for threats to be leveled against China's pegged yuan. "The most effective way at this time to achieve the goal of a flexible, market-based exchange rate in China is to maintain the persistent engagement we have established," Treasury Secretary John W. Snow said at a news conference then.

Asked what has prompted the recent hardening in their position, senior administration officials observe that circumstances have changed. For one thing, China's overall trade in goods and services was in deficit in the first quarter of last year, but the nation finished up the year with a trade surplus of $32 billion, and in the first quarter of this year its surplus was about $16.6 billion.

Moreover -- though administration officials are loath to discuss it publicly -- Bush's chief trade initiative this year, the Central Amer ican Free Trade Agreement, is in trouble on Capitol Hill, and by proving its mettle on China the White House stands a better chance of attracting pro-CAFTA votes from reluctant Republican lawmakers.

Whatever eventually prompts China to lift the value the yuan, such a measure could prove a critical first step toward curbing the trade deficit, according to many economists, because it could lead to a rise in the currencies of other Asian countries that also ship massive amounts of goods across the Pacific.

"If China revalues by itself, it wouldn't help the U.S. [trade] deficit very much," said Morris Goldstein, a scholar at the Institute for International Economics. "What you're trying to do is move not just the Chinese, but get a very broad depreciation of the dollar." Goldstein calculates that if the currencies of Japan, China, Korea, Malaysia and other Asian nations rise about 20 percent against the dollar, the broadest measure of the trade gap would decline by about $70 billion to $80 billion.

But those who are badgering Beijing "make it tough for China to reform its system," said Albert Keidel, senior associate at the Carnegie Endowment for International Peace, who until late last year was one of the Treasury's top Asia hands. Feverish speculation that the yuan will soon be worth more is prompting investors to pour as much money as they can into China, in the hopes that they will be holding yuan when the currency rises.

"If China were to introduce some small change in its system, people would say, 'Aha, the currency is no longer fixed,' and they would put more money in," Keidel said. "And if the Chinese moved [the yuan] a lot, people would say, 'Aha, now it's time to get out -- and they'd all get out. So all this jawboning delays the day" when meaningful reform can take place.