Currency of China Is Emerging as Tough Business Issue in U.S.
August 26, 2003
By ELIZABETH BECKER and EDMUND L. ANDREWS
WASHINGTON, Aug. 25 - With unemployment high and American
manufacturers reeling from three years of misery,
politicians and businesspeople around the country have
found a villain to blame for these troubles: China, or more
specifically its currency.
In South Carolina, the Republican governor, Mark Sanford,
cites the currency, the yuan, as posing a major threat to
his state's struggling textile industry by making Chinese
exports unreasonably cheap.
In Erie, Pa., executives and workers at scores of
industrial companies are planning a loud protest on Labor
Day over "unfair competition" - and one of the biggest
targets will be the seemingly obscure matter of the yuan.
And in Washington, the Bush administration is gearing up to
put direct political pressure on China next week when
Treasury Secretary John W. Snow makes a highly publicized
trip through Asia. The subject was near the top of the
agenda when President Bush met with his economic team two
weeks ago in Crawford, Tex.
The issue is the value of the yuan, which the Beijing
government pegs to the dollar rather than allowing it to
float in world currency markets. Critics say that keeps the
yuan undervalued by as much as 40 percent, enabling Chinese
manufacturers to flood the United States with products at
prices that homegrown companies cannot match.
Though Chinese exports have been growing at the expense of
American manufacturing jobs for years, the volume of the
complaints has risen with the unemployment rate - and with
the approach of national elections next year. And no matter
what it does, the White House is on treacherous ground.
If the administration does not push China hard enough, it
risks losing crucial support in important electoral
districts. But if it pushes too hard, it could alienate
China at a time when the United States needs Beijing's help
in containing North Korea.
Then there is the risk of alienating American consumers,
who benefit from inexpensive Chinese goods. "This is
probably the hottest single trade issue," said
Representative Phil English, Republican of Pennsylvania and
head of the Congressional steel caucus. "I believe the
administration would be making a big mistake if it ceded
the high ground on this issue to some of Mr. Bush's
competitors."
In a blunt letter to President Bush last month, 16
Republican and Democratic senators and representatives
complained that China was undercutting American factories
by intentionally keeping its currency undervalued.
The lawmakers, from Democrats like Senator Charles E.
Schumer of New York to Republicans like Mr. English and
Senator Elizabeth Dole of North Carolina, demanded that Mr.
Bush press China to adopt a free-floating currency and to
let the yuan rise in value.
"The fragile coalition for free trade is weakening because
of the huge loss of manufacturing jobs in most parts of the
country," Senator Schumer said. "Correcting the exchange
rate with China is the perfect way to stem some loss of
jobs without violating international trade rules."
Senator Joseph I. Lieberman, Democrat of Connecticut,
signed the letter and has made the issue part of his
presidential campaign platform.
An undervalued currency makes a country's exports cheaper
than they might otherwise be, which in turn puts increased
pressure on companies in countries with stronger
currencies.
During Mr. Snow's two days of meetings next week,
administration officials say he will urge China's leaders
to rethink their long-held policy of locking the yuan at a
fixed exchange rate of 8.28 to the dollar.
Still, the administration is reluctant to anger China. For
one thing, the United States will commence six-country
talks in Beijing on Wednesday over how to deal with North
Korea's nuclear program.
Beyond that, administration officials say the economics are
far more complex than they first appear.
Some are worried that an abrupt rise in China's currency
might set off a deflationary spiral there that would
imperil China's troubled banking system. China's central
bank announced today that to shore up its system it would
raise the level of deposits required of commercial banks.
Administration officials also note that China is one of few
engines in the world economy that is still running at top
speed. Putting a brake on that engine could create as many
problems as it solves. And they know that a jump in the
yuan would lead to unpleasant price increases on everything
from clothing to household appliances in the United States.
As a result, administration officials are moving more
cautiously than many manufacturers would like. The message
to China "will be explicit" that flexibility would be in
China's self-interest and "very clear," a senior
administration official said today. But the message will be
diplomatic.
For the last nine years, China has maintained the yuan's
exchange rate against the dollar by buying or selling
dollars when necessary, a policy aided by the fact that
China has much stricter currency controls than most
countries. Consequently, the yuan has moved in lock step
with the dollar, even though China's trade surplus and its
foreign reserves have grown enormously.
Defenders of China's policy note that it has at least been
consistent. The yuan rose in line with the dollar during
the late 1990's, even after other countries drastically
devalued their currencies amid the Asian financial crisis.
The International Monetary Fund has been watching the
issue, and officials said today that they also believed
that China should show "greater flexibility" toward its
exchange rate.
But Beijing has made it clear that it will make only token
gestures to the administration. At most, Chinese officials
may offer Mr. Snow a loosening of some currency controls or
a promise to begin a formal examination of its policies.
That seems unlikely to damp the rising anger in America's
industrial heartland.
Governor Sanford of South Carolina and Jennifer M.
Granholm, the Democratic governor of Michigan, both said
that the exchange rate had become an issue in their states.
"In the Textile Belt, there are a number of governors who
are acutely aware of the problem," Mr. Sanford said in an
interview. "But our ability to impact currency rates
halfway across the globe is frankly nonexistent."
For her part, Governor Granholm said that the issue was so
important to retaining manufacturing jobs in her state that
she would make it one of the litmus tests as she decides
which candidate to endorse in the Democratic presidential
primary.
C. Fred Bergsten, director of the Institute for
International Economics in Washington, said that the
domestic pressure against Chinese imports would only
increase.
"If nothing is done, you could get an outbreak of
protectionism here against China," Mr. Bergsten said in an
interview.
Few American consumers have been oblivious to the
increasing ubiquity of "Made in China" labels. The trade
deficit with China has exploded to over $100 billion,
thanks to market-opening trade agreements and to China's
seemingly limitless supply of extremely low-wage workers,
in addition to the role of the yuan.
Chinese exports to the United States have doubled to $125
billion in 2002 from $62 billion in 1997.
American exports to China, by contrast, have crept up only
modestly over the same period, to $19 billion from $13
billion.
Phil Tredway, president and owner of Erie Molded Plastics
Inc. in Erie, Pa., is among the many manufacturers bitterly
complaining about Chinese exchange rates.
"Our customers have a market without borders and sourcing
without borders, and we know that," Mr. Tredway said today.
"We can compete against China's low labor costs, and we can
compete with them if they play by the rules. But we cannot
compete with them if they have a 20 percent to 40 percent
currency advantage."
At Erie Molded Plastics, a 21-year-old business that makes
products like electrical connectors and plastic bottle
caps, sales have plunged 20 percent in the last three
years, to about $8 million.
"I'm a Republican and a strong supporter of President
Bush," Mr. Tredway said. "But the administration doesn't
have any idea how many jobs have been lost because of
this."
But international brow-beating over exchange rates can be
risky and dangerous for all countries concerned. Charlene
Barshefsky, who was the United States trade representative
under President Bill Clinton, said that China's exchange
rate was a legitimate issue, but she warned against formal
accusations of unfair trade practices.
"These trade actions are very costly to bring and success
is not assured," she said. "The U.S. is now getting as good
as it gets and has become the most prominent country
against which antidumping rules are brought, to the
detriment of our exporters."
Regardless of the risks, manufacturers are planning to
force the issue as the presidential and Congressional
election campaigns intensify.
Ernest H. Preeg of the Manufacturers Alliance, a
business-supported policy research group, made it clear
that many companies are disgruntled with the administration
on this issue.
"Manufacturers are not going to let the administration
fudge the issue," he said. "Just when we're getting hit by
the recession, we're getting clobbered by currency
manipulation. That's unfair."
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