Exchange Rate Tops Paulson's Agenda

Treasury Secretary Henry M. Paulson Jr. returned to China yesterday for the first in a series of high-level talks aimed at helping the Asian giant bring its economy into the 21st century. But while the formal agenda for Paulson's "strategic economic dialogue" covers such prosaic matters as pensions and health care, lawmakers and interest groups in Washington expect Paulson to show them the money.

"It's all about the exchange rate," said Gary C. Hufbauer, a China expert and senior fellow at the Peter G. Peterson Institute for International Economics. "If the exchange rate were to stay where it is or go down [only slightly], this will be regarded as a great failure."

The two-day summit kicked off this morning in Beijing with introductory remarks at the Great Hall of the People, festively decorated with giant pots of poinsettia plants -- eight of them, a lucky number in China.

Calling this a "great event" in the history of U.S.-Sino relations, Chinese Vice Premier Wu Yi said she thinks the meeting will "generate a positive impact for sustainable development of the world economy."

But her opening remarks contained no mention of the currency issue that has dominated discussion in the United States about the meetings.

In recent weeks, Paulson has taken pains to play down the issue of the value of the Chinese yuan, one of the most contentious economic matters facing Washington. Critics say Beijing keeps the yuan artificially low against the U.S. dollar, giving Chinese manufacturers an unfair advantage over U.S. competitors and causing layoffs in the American heartland. But China is famously impervious to Western pressure, and Treasury officials have emphasized that the Beijing meeting will focus on long-term structural change in the Chinese economy rather than short-term gains.

U.S. lawmakers and manufacturing groups say they are impressed by the new Treasury secretary and his high-powered entourage, which includes five Cabinet members and Federal Reserve Chairman Ben S. Bernanke. Their talks with Chinese leaders began late last night local time and are scheduled to conclude tomorrow.

But they said Paulson must show tangible results -- preferably an increase of at least 5 percent in the yuan's value against the dollar -- within the next few months.

"If something doesn't happen soon, there will be rising protectionism, not just in the U.S., but also in Europe," said Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers, which has pressed the administration for action.

"The stakes are high," Sen. Charles E. Schumer (D-N.Y.), incoming chairman of the congressional Joint Economic Committee, said in a statement. "The new Congress will be eager to see the results of the trip, because just talking will not suffice any longer."

Schumer and Sen. Lindsey Graham (R-S.C.) this year proposed slapping a 27.5 percent tariff on Chinese goods. They withdrew the proposal in September, partly to give Paulson, who took the job in July, time to get established. But Schumer, Graham and leaders of the Senate Finance Committee plan to revisit the issue when the new Congress convenes in January.

If the yuan does not rise further, Schumer said, it could damage the "increasingly fragile consensus for free trade" on Capitol Hill, where as many as 37 new lawmakers who campaigned against further trade liberalization are expected to take office in January, according to Public Citizen's Global Trade Watch.