Currency Questions Intensify between US and China ; in Tense Negotiations, the Administration Pushes China to Revalue Its Currency, but Some Experts Doubt the Benefits

Article excerpt

Trade agreements require trust - confidence that both sides will live up to the terms of the deals and play fair.

Now, the fabric that holds together the US trading relationship with China is being pulled and stretched. Because of the importance of these two nations, how the tensions play out could affect both the global economy and the climate for expanding trade.

The Bush administration has become increasingly vocal about the differences with China and recently capped some of its apparel imports. Congress is considering a bill to put tariffs on Chinese- made products if China doesn't revalue its currency. Business groups are also lobbying for change, and last week Treasury Secretary John Snow said he expected China will make some change to its currency over the next several months.

But behind the new signs of urgency, economists caution that a revalued yuan is no cure-all for America's wide trade deficit with China. For example, Federal Reserve Chairman Alan Greenspan said last week that the US trade deficit wouldn't come down due to a revaluation, since other countries with low labor costs would make the goods instead.

That apparently has not stopped the administration from pushing ahead. Wednesday, Sen. Charles Schumer (D) of New York, who has sponsored legislation to punish China for currency manipulation, noted at a Monitor breakfast that a high Treasury official told him the legislation was helping in dealing with China.

According to the Tuesday edition of the Financial Times, the US Treasury has informed the Chinese it must revalue its currency by at least 10 percent to defuse tensions with Congress. It also says that the US is using private citizens such as Henry Kissinger and Brent Scowcroft to communicate with the Chinese.

A Treasury spokesman did not return phone calls to the Monitor.

Some international observers question whether private individuals should be used to communicate with the Chinese. "The Treasury secretary is perfectly capable of calling the Chinese," says Robert Hormats, vice chairman of Goldman Sachs International. "I question how appropriate it would be to ask a private individual to suggest what an exchange rate would be."

Dean Baker, co-founder of the Center for Economic and Policy Research in Washington, says the administration is aware of the downside of a rising Chinese currency: Import prices and interest rates may rise. US consumers have benefited from being able to buy lower-cost clothing, electronics, and other goods. At the same time, China is currently investing about $1 billion a day in the US.

"China is handing us hundreds of billions [through their investments in US Treasury securities] to buy their stuff," says Mr. Baker. "At some point they might want to use that money. …