- The Washington Times - Thursday, October 30, 2003

The Bush administration, brushing aside calls from lawmakers for retaliation against what they see as unfair Chinese trade practices, yesterday declared China is not in violation of laws prohibiting countries from manipulating their currencies for competitive advantage.

The finding by the Treasury Department surprised and angered members of Congress and manufacturing groups that are pushing for aggressive action to stem China’s inroads into U.S. markets, including the imposition of stiff 27.5 percent tariffs on Chinese imports. Politicians in both parties increasingly blame China for the loss of millions of U.S. manufacturing jobs in recent years.

“I recognize the need to address exchange rates as part of our overall international economic strategy,” Treasury Secretary John W. Snow told the Senate Banking, Housing and Urban Affairs Committee, but he cautioned against starting what could become a trade war with the Asian giant that only ends up thwarting growth in both countries.

A Congressional Budget Office report released yesterday suggested the tariff proposal could harm the U.S. economy because, while it would discourage Americans from buying Chinese goods, it would do nothing to encourage the Chinese to buy U.S. goods and services.

Between 1992 and 2002, U.S. exports to China shot from $7.5 billion to $22.1 billion, an average annual rate of growth of 11.4 percent, the CBO said. The growth has turned China into the fifth-biggest buyer of U.S. goods. Passage of a protective tariff “raises the possibility of a corresponding Chinese policy against U.S. exports,” the report said, making any benefit “uncertain.”

Mr. Snow said the administration already is doing all that it can to get China to stop fixing its currency against the dollar. China has committed to eventually lift its controls on the yuan, and is taking steps to strengthen its shaky financial sector.

“The financial diplomacy we’re engaged in is the surest course to get what we want,” Mr. Snow said.

The Treasury determined in its report to Congress that a currency peg like China’s is not in itself a violation of U.S. or international laws, noting that small countries sometimes benefit from the stability created by a peg to strong currencies like the dollar.

“This report is a whitewash,” said Sen. Charles E. Schumer, New York Democrat and sponsor of the tariff measure. Sen. Jim Bunning, Kentucky Republican and a co-sponsor of the bill, said it’s obvious “the Chinese are cheating.”

Mr. Snow stressed that the administration, like most members of Congress, believes a fixed-exchange system is not the best one for a major economic power like China. All the big economies in the world except China have flexible exchange rates. Even before the issue took fire in Congress this year, the administration was urging China to change, Mr. Snow noted.

One concrete sign that China is moving toward a flexible exchange rate is that it recently broached talks with the Chicago Mercantile Exchange about setting up a futures market in the Chinese currency much like the one that investors now use to bet on the future course of the dollar, yen and other major currencies.

“There’s no point in having a currency-futures market unless you have a floating currency,” Mr. Snow said. China’s central bank governor Zhou Xiaochuan “has endorsed this project with the Merc.” Mr. Snow met with both Mr. Zhou and Merc executives in the last week.

Mr. Snow said China’s discussions with the Chicago exchange are at an advanced stage. China has a “memorandum of understanding to retain the Merc to do this for them,” he said. Merc spokeswoman Anita Liskey confirmed the discussions.

“We do have ongoing relationships with a number of government agencies in China,” including the Shanghai Futures Exchange, she told Bloomberg News.

“We’re working to assist them in developing market structures as well as a variety of financial derivatives that will ultimately help them transition to a market economy.”

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