- The Washington Times - Friday, July 25, 2003

Congressional leaders are calling on the Bush administration to confront China and other Asian countries that artificially depress their currencies to gain a competitive advantage over American exporters, causing job losses in the United States.

They raise a delicate issue, however, since Asian countries recently have done much to finance the United States’ record trade and budget deficits by investing the dollars they earned selling exports to this nation back into U.S. Treasury bonds and other securities.

“It is time for the U.S. government to get serious with countries who tamper with their currencies to give their companies an unfair advantage over U.S. manufacturers,” said Rep. Donald Manzullo, Illinois Republican and chairman of the House Small Business Committee.

“These actions are obvious violations of the World Trade Organization and International Monetary Fund, and these countries must be held accountable,” Mr. Manzullo said.

Mr. Manzullo and Senate Small Business Committee Chairman Olympia J. Snowe, Maine Republican, asked the General Accounting Office on Wednesday to investigate currency manipulation by China, Japan, South Korea and Taiwan, and the effect on the U.S. economy.

China since 1994 has fixed its currency, the yuan, at 8.3 to the dollar, while the other Asian countries officially let their currencies float. But all the Asian central banks secretly intervene in the currency markets to prop up the dollar and in doing so have accumulated huge amounts of U.S. dollars and securities estimated at more than $1 trillion.

Currency manipulation by China “is particularly disconcerting,” Mrs. Snowe said, “as China recently became a member of the World Trade Organization, whose inherent purpose is to ensure free and fair trade.”

China’s fast-growing trade surplus with the United States surpassed Japan’s last year to become the largest. This huge trade surplus is the biggest sore point for U.S. manufacturers, prompting a bipartisan group of senators last week to urge Treasury Secretary John W. Snow to engage China in negotiations intended to remove its artificial ceiling on the yuan.

“The yuan is being artificially undervalued, and this undervaluation may be contributing to the significant job loss the United States has seen in its manufacturing sector,” the senators said.

Manufacturing has been the weakest spot in the U.S. economy for two years, and the layoff of more than 2.6 million manufacturing workers weakened the broader economy.

The four senators — Charles E. Schumer, New York Democrat; Elizabeth Dole, North Carolina Republican; Evan Bayh, Indiana Democrat; and Lindsey Graham, South Carolina Republican — represent states with big manufacturing and textile industries.

“Many manufacturing jobs are moving overseas” as low exchange rates and wage rates increasingly entice businesses to locate in China, they said. As a result, China has enjoyed high growth rates fueled by booming exports, which account for almost a quarter of the United States’ $460 billion trade deficit.

Because it might help put a lid on U.S. job losses, a change in China’s policy would be politically advantageous to President Bush. The treasury secretary openly has urged China to switch to a more flexible exchange rate, which economists estimate would raise the value of the yuan 5 percent to 50 percent.

“I’m encouraged from things we’re hearing from the Chinese that they’re willing to widen their peg,” Mr. Snow said in an interview Tuesday with CNBC. “That would be helpful.”

Mr. Snow has refrained from putting pressure on the Japanese, however, noting that Japan, Asia’s largest economy, continues to battle a vicious deflationary cycle that would be worsened by any sharp appreciation of the yen.

Federal Reserve Chairman Alan Greenspan, whose dramatic interest-rate cuts since fall have helped induce a major weakening of the dollar against the euro, recently argued that the Chinese would be better off raising the value of their currency to avoid having to keep accumulating massive dollar reserves.

But currency specialists say important constraints prevent the United States from pushing too aggressively for change. One is the administration’s hope that the Chinese will help resolve the United States’ dispute with North Korea about nuclear weapons.

Also, China’s economy suffered a shock in the spring from the breakout of severe acute respiratory syndrome, or SARS, and officials there do not want to further weaken it by revaluating. That is apparently why China has ruled out, for now, any change in its currency regime.

Perhaps the most important drawback is fear of what China would do with the $345 billion of reserves in cash and U.S. securities that it amassed through the years.

That money has been invested heavily in U.S. bonds and is helping finance the trade and budget deficits. Any move by China to reduce its reserves and sell the bonds would drive up U.S. interest rates. Rumors that China was unloading some of its vast reserves provoked a spike in interest rates earlier this month.

“We in America have never been more dependent on the kindness of foreigners than we are today,” said Edward Yardeni, chief investment strategist with Prudential Securities.

He noted that purchases of U.S. bonds, primarily by Asian buyers in the past year, have financed 58 percent of the $312 billion U.S. budget deficit. The deficit is expected to bloat even further, to $455 billion, in coming months.

Asian purchases of Ginnie Maes and other mortgage-backed securities also helped finance the unprecedented American home-refinancing boom of the past two years, which proved critical for keeping the economy afloat.

“Foreigners have been especially kind in helping to finance the huge demand for mortgages in the United States,” Mr. Yardeni said.

Although a weaker dollar might help U.S. exporters, it would hurt U.S. consumers and home buyers if it prompts Asian countries to sell considerable holdings and drive up U.S. interest rates in the process, he said.

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