Battle Rises Over China
Treasury's Silence on Yuan Provokes Senate Bill

By Peter S. Goodman
Washington Post Staff Writer
Thursday, June 14, 2007

After months of insisting that China allow the market to set the value of its currency or risk damaging the world economy, the Bush administration yesterday declined to brand China a currency manipulator.

The decision by the Treasury Department to spare Beijing an official rebuke in a semiannual review of foreign currencies unleashed a fresh chorus of demands on Capitol Hill for trade action against China.

Four Republican and Democratic senators yesterday introduced legislation designed to pressure the administration to take a stronger line. Their bill would direct the Treasury to consult with the Federal Reserve and foreign central banks about intervening in currency markets to cancel out the effects of manipulation by China or other countries.

"The inaction of China over the last two years has disappointed us and disappointed us and disappointed us," Sen. Charles E. Schumer (D-N.Y.) said at a news conference. "The administration has been too slow in my judgment to act against Chinese unfair trade practices."

Analysts said the bill has little chance of passage, and the Treasury continued to endorse talks, not legislation, as the best way to manage tensions with China. But the prospect of punitive action by Congress still drew an angry reaction from across the Pacific.

"The Chinese side has already made many concessions," said Song Hong, director of the Institute of World Economics and Politics at the government-affiliated Chinese Academy of Social Sciences in Beijing. Further pressure from Washington, he said, would create "an attitude of growing non-cooperation, and the currently already fragile negotiating relationship will be destroyed."

The issue of China's currency, the yuan, has in recent years emerged as a central irritant in its complex trade relationship with the United States. Manufacturing groups in the United States claim that China keeps the value of the yuan artificially low, making its goods unfairly cheap on world markets and thereby stealing American jobs.

Such claims have grown strident with the expansion of the U.S. trade deficit with China -- $233 billion at the end of last year, by U.S. estimates -- and as China's foreign exchange reserves have swelled to more than $1 trillion.

China counters that it has been cast in Washington as the scapegoat for the decline of American manufacturing jobs, while arguing that consumers worldwide benefit from low-cost Chinese goods.

China has long said it eventually plans to allow the yuan to float freely, but it insists the move must be gradual, to allow Chinese banks and exporters to gain expertise in managing the risks of currency fluctuation. China's leaders face intense pressure to support export industries, whose factories are a crucial source of jobs for millions of peasants streaming to the cities.

Two years ago, after American complaints, China increased the value of the yuan by about 2 percent. Since then, the yuan has increased by 6 percent. American trade groups say the yuan remains undervalued by as much as 40 percent.

In recent years, a parade of Bush administration envoys have traveled to China with demands for swifter movement, only to be rebuffed. When Henry M. Paulson Jr. became Treasury secretary last year, he raised expectations of greater headway. Paulson had traveled to China frequently as chairman of Goldman Sachs, gaining familiarity with top officials.

Paulson launched a high-level dialogue aimed at resolving a host of thorny trade issues, from the currency dispute to U.S. complaints of rampant piracy of intellectual property. After two rounds of talks, however, neither the value of China's currency nor Beijing's rhetoric has changed much.

Democrats, now in charge of Congress, have increased demands for tougher action on China as part of a broader push to tackle the strains of globalization.

In March, the Commerce Department announced punitive tariffs against Chinese paper manufacturers accused of dumping goods in the United States below cost. The decision yesterday by the Treasury to not label China as guilty of currency manipulation gave critics a fresh opportunity for complaint. Though a finding in the affirmative would have been largely symbolic, triggering talks with China, proponents said it could have pressured Beijing to go faster.

In its report, the Treasury said China's currency "is undervalued and market sentiment clearly favors appreciation." But the department said it could not brand China a currency manipulator because it was "unable to determine that China's exchange rate policy was carried out for the purpose of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade."

The U.S. trade representative, deferring to the Treasury, yesterday declined a petition from 42 members of Congress calling on the administration to challenge China's currency policy by filing a complaint with the World Trade Organization.

Critics accused the administration of using a technicality -- the inability to divine China's intent in managing its currency -- as an excuse to do nothing.

"It is difficult to understand why Treasury chooses not to say that currency manipulation is taking place when everyone knows it is," John Engler, president of the National Association of Manufacturers, said in a statement.

Rep. Sander M. Levin (D-Mich.), who chairs a House subcommittee on trade, called the Treasury's reasoning "the kind of dodge that gives this administration no credibility with American businesses and workers disadvantaged by China's persistent currency manipulation."

At a news conference, Treasury officials declined to respond directly to such criticisms but said they believe their approach to China would eventually yield results. "The best way to engage China is through dialogue and engagement, and not necessarily legislation," said Clay Lowery, the Treasury's acting assistant secretary for international affairs.

On Tuesday, the chairman of the Senate Banking Committee, Christopher J. Dodd (D-Conn.), and ranking Republican member Richard C. Shelby (Ala.) said they would craft legislation that directs the Treasury to declare currency manipulation regardless of intent. The Treasury would seek remedies through consultations with the International Monetary Fund or by filing a complaint with the World Trade Organization.

The Senate bill introduced yesterday is similarly aimed at forcing the Treasury's hand regardless of intent, requiring action so long as a currency is found to be "fundamentally misaligned."

The bill amounts to a refined version of legislation pressed last year by Schumer and Sen. Lindsey O. Graham (R-S.C.) that would have slapped 27.5 percent tariffs on all Chinese goods without a substantial appreciation of the yuan. That bill was seen as breaking the rules of the World Trade Organization. The bill outlined yesterday, with Schumer, Graham, Sen. Max Baucus (D-Mont.) and Sen. Charles E. Grassley (R-Iowa) as sponsors, is designed to comply with the rules, the senators said.

"This is pretty much a jab at the Treasury for not doing its job," said Gary C. Hufbauer, a trade expert at the Peter G. Peterson Institute for International Economics in the District. "There's a lot of domestic politics in these bills."

Correspondent Ariana Eunjung Cha in Shanghai contributed to this report.