Obama urged to act on China's currency manipulation

China has a strict peg between its currency and the U.S. dollar.
China has a strict peg between its currency and the U.S. dollar. (Associated Press)
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By Howard Schneider
Washington Post Foreign Service
Friday, March 26, 2010

Pressure is mounting on the Obama administration to take action against China for undervaluing its currency, with business leaders, economists and other analysts citing the issue as emblematic of a broader tension developing in one of the world's central trading relationships.

The Treasury Department on April 15 will issue a semiannual report on the management of currencies around the world in which it will have to decide whether China manipulates its exchange rates "for purposes . . . of gaining unfair competitive advantage in international trade." China maintains a strict peg between the value of the renminbi, its currency, and the U.S. dollar, and there is broad agreement that the rate is lower than it would be if the currency traded openly -- perhaps by as much as 25 percent, making Chinese goods that much cheaper on global markets.

In two prior reports since President Obama took office, the department shied away from making such a declaration, hesitant to provoke a trade dispute as both countries were responding to the global economic downturn. Instead, officials folded the currency question into the administration's larger aim of resolving issues through negotiation and engagement in international organizations, such as the Group of 20 economically powerful countries.

But a year later, the economic landscape has shifted. China's exports have rebounded, and its economy is growing strongly enough that U.S. officials think the country needs to shift away from the export-dominated strategies that have fueled its growth.

U.S. joblessness, meanwhile, has responded little to renewed growth, and some cite the massive trade deficit with China as a drag on U.S. employment. The United States in 2009 bought $226 billion more in goods and services from China than it sold to the country, representative of an imbalance that has ballooned over the past decade since China joined the World Trade Organization and that has exceeded $200 billion annually for the past five years.

Political stakes

Few consider the trade deficit fully reversible -- low-cost Chinese goods are deeply integrated in the purchasing and supply chains of U.S. retailers, and have helped lower prices for a wide array of goods. China has been a key buyer of U.S. Treasury bonds as well, helping to fund U.S. budget deficits by recycling its export earnings.

But recapturing even a fraction of that trade deficit could be a boon for U.S. businesses, and increasing the value of the renminbi, also known as the yuan, would make competing U.S. products more attractive in sales to third countries.

"The politics of this has gotten worse -- both in terms of the U.S. and in terms of the world," said Ted Truman, a senior fellow at the Peterson Institute for International Economics who advised the Treasury Department during the first months of the Obama administration. "We have said we are not going to be the consumers of last resort and we need a healthy growth of our exports, and that is not going to work if everybody else undervalues their currency."

Given the political stakes -- and U.S. unemployment near 10 percent -- an issue that has often been the province of technical analysts at Treasury and the Federal Reserve has become part of the larger debate over how relations between the United States and China will change in the wake of the global economic crisis -- and how forceful Washington should be in trying to change the equation.

A currency peg in and of itself is not considered manipulation; it has to be done with an aim of enforcing an economic advantage to merit that designation. There has been an increasingly vocal chorus calling for the administration to at least cite China for currency manipulation -- if only to inject a sense of urgency to the discussion, and perhaps elicit support from other countries that disagree with China's currency policy. The designation would trigger "expedited" negotiations with China over a currency revaluation, and some have called for punitive tariffs to be levied on Chinese goods if talks are unsuccessful.

At a House Ways and Means Committee hearing this week, a panel of economists urged Treasury Secretary Timothy F. Geithner to make the declaration, saying the United States would appear "feckless" and the "wimps of the Western world" if it skirted an issue of global importance out of deference to quiet diplomacy with the Chinese. And some members of Congress are threatening to tighten the U.S. trade rules over currency manipulation and leave the administration with less discretion over how to respond.

Chinese officials have been blunt in their view of the matter, saying that U.S. pressure to change their currency could ignite a trade war between two countries whose cooperation is considered key to the global economic recovery.

Chinese response

The heated rhetoric has some self-described China advocates worried that the political climate surrounding trade is deteriorating. U.S. businesses are complaining more openly about Chinese policies they regard as unfair, with a long-standing dispute over censorship between Google and China's government bubbling over in recent weeks. The Obama administration also has been disappointed with China's response to other issues, including climate change and Iran's nuclear program.

"There is palpable and rising concern that China is becoming less friendly to foreign firms," Myron Brilliant, head of the international division at the U.S. Chamber of Commerce, told a group of Chinese officials on Thursday during a visit to the country, adding that in the United States "pressures are mounting" for action to lower the trade deficit between the two.

The currency issue is not without controversy in China. A group of industrialists has encouraged a rise in the value of the renminbi, saying it would bolster many Chinese businesses by encouraging more domestic spending. In addition, defending the dollar peg forces China's central bank to buy billions of dollars in Treasury securities, money some argue could be put to better use inside the country.

The currency issue reached a similar high pitch in 2005 but was defused when Beijing allowed the value of the renminbi to rise about 20 percent. It reinstituted a dollar peg in 2008 during the global economic downturn, and officials have said currency rates would change when "national conditions" warranted. Most major world currencies trade freely, leading, for example, to daily fluctuations in how many dollars can be bought with a euro. Those shifts can be large over time and are one way for trade imbalances between countries to even out.

In its last report on China's currency, the Treasury said the renminbi "remains undervalued" but cited favorably several steps the country had taken to keep the global economy -- as well as its own -- from an even deeper downturn. In a speech this month on trade, President Obama said a revalued currency would make "an essential contribution" to a healthier global economy, but he indicated that the United States was committed to working through the G-20 to achieve a broader "rebalancing" in world trade.

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