U.S.-China Trade Clash Seen

Analysts see rising risks of a trade war with China following U.S. comments on "currency manipulation."
By Michael Lelyveld
2009-02-02
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BOSTON--Experts predict the United States will take a tougher stand against China's currency practices following a statement by incoming Treasury Secretary Timothy Geithner last month.

At confirmation hearings before the Senate Finance Committee on Jan. 22, Geithner suggested a policy shift that could lead to charging China with unfair trade practices through currency manipulation.

"President [Barack] Obama, backed by the conclusions of a broad range of economists, believes that China is manipulating its currency," Geithner said in written remarks.

"The question is how and when to broach the subject in order to do more good than harm."

Geithner's statement is the latest development in economic frictions with China that have been festering over the past six years. Since 2003, U.S. manufacturers, labor groups, and lawmakers have accused China of creating an unfair advantage for its exports by keeping the yuan's value artificially low.

U.S. economists have argued that deliberate undervaluation of the yuan by as much as 25 to 40 percent has cost thousands of American jobs and bloated the bilateral trade deficit to a record $256 billion in 2007.

Under pressure in 2005, China announced a limited reform to allow strengthening of its currency in slow stages. Since then, the yuan has risen against the dollar by some 17 percent. But in the second half of last year, China slowed the appreciation to keep its exports from sagging.

The issue has been a constant topic of U.S.-China negotiations. But former Treasury Secretary Henry Paulson repeatedly declined to cite China for currency manipulation in semi-annual reports, required by a 1988 trade law, preferring a course of personal contact and persuasion.

Agenda 'has shifted'

Efforts to pass legislation that could punish China were delayed in Congress after the administration of former President George W. Bush appealed for more time to let diplomacy work.

But experts believe that will change with the Treasury Department's next report in April.

"It would be difficult for Geithner and the administration to backtrack from saying that China is a currency manipulator," said David Bachman, professor of international studies at the University of Washington in Seattle.

"I think the agenda has shifted," Bachman said in a Radio Free Asia interview.

Under U.S. trade law, the "currency manipulation" designation would trigger a requirement for expedited consultations to "eliminate the unfair advantage." Trade retaliation could come next.

"If those negotiations fail to produce results--I would guess by the end of 2009--then I think the Congress will put increasing pressure in the form of legislation to impose sanctions on China," said Bachman.

China has responded to Geithner's statement with a series of denials.

'A sensible level'

On Jan. 24, Su Ning, vice governor of the People's Bank of China, called the manipulation charge "untrue and misleading," the official Xinhua news agency said.

Speaking on Jan. 29 at the World Economic Forum in Davos, Switzerland, Premier Wen Jiabao criticized protectionism, and later insisted during a visit to Germany that China is "determined to keep [the yuan] at a sensible level."

But on Jan. 26, International Monetary Fund Managing Director Dominique Strauss-Kahn agreed with the U.S. position that the yuan is "significantly undervalued," Reuters reported.

"We need the Chinese to change their policy, try to have less export-led growth, shifting to more domestic-led growth," Strauss-Kahn said. "And the point is, how do we move to attain something from China?"

Experts do not believe that Geithner's comments are merely a tactic aimed at convincing China to take another small step on its currency.

"This is a very strong statement made very early in the administration," said Lowell Dittmer, political science professor at the University of California's Berkeley campus.

"The administration is not happy about this."

Previous positions


Geithner's comments are also consistent with Obama's previous positions as a senator, Dittmer told RFA.

On Jan. 30, President Obama spoke directly with President Hu Jintao about the currency issue and efforts to restore economic stability, news agencies reported.

"President Obama stressed the need to correct global trade imbalances as well as to stimulate global growth and get credit markets flowing," the White House said in a statement.

Although some reports have raised concerns that China could retaliate against trade sanctions by halting purchases of U.S. Treasury bills, Dittmer doubted such a move would have a major effect.

"I don't really take the refusal to buy Treasury bills too seriously. If they stop buying, others will buy," said Dittmer. "There's a market out there."

But experts take the prospect of trade retaliation more seriously.

"There is more concern about a trade war," said Dittmer.

"The Chinese are tough and they like to play tit-for-tat," Bachman agreed.

"We can get into a descending spiral pretty easily if we don't figure out a mutually satisfactory way to deal with this problem," Bachman said.


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