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. …