- The Washington Times - Tuesday, September 2, 2003

Treasury Secretary John W. Snow, in an effort to curb a politically damaging drain of U.S. manufacturing jobs, yesterday urged Chinese officials in Beijing to stop artificially depressing the value of their currency to make inroads into U.S. markets.

Mr. Snow, who says he is using “quiet diplomacy” in light of China’s role as host in nuclear-disarmament talks with North Korea, told reporters afterwards that the Chinese were attentive to his arguments.

But Chinese officials said publicly that now is not the time to abandon a fixed exchange-rate regimen that has helped turn the Asian giant into a global manufacturing powerhouse that this year is expected to overtake Japan as the world’s third-largest exporter.

China reportedly is considering minor adjustments to show President Bush, who faces daily criticism from Democratic opponents for the loss of 2.7 million manufacturing jobs since he took office, that it is responsive to the issue. One such measure would be to withdraw government subsidies for Chinese manufacturers of textiles, shoes, furniture and other goods that compete directly with U.S. businesses.

Mr. Snow, Federal Reserve Chairman Alan Greenspan and other Western leaders have tried to persuade China to stop pegging its currency, the yuan, to an artificially low dollar rate because it is leading to huge trade surpluses with the United States and other countries. While that stimulates Chinese jobs and economic growth in the short term, in time it will create serious economic and financial problems and imbalances, they say.

“It’s in China’s interest to have a more flexible currency system, and it’s in their interest to continue the process of opening up the capital flows in and out,” Mr. Snow said after his first meeting in Beijing with Bank of China Governor Zhou Xiaochuan and Finance Minister Jin Renqing. “I think they listened to that point.

“As they move forward with reducing their controls on capital flows in and out, it’s critical that they move to a flexible currency, because one sure way to build in adjustment problems in an economy, and discontinuities in an economy, is to have open capital flows and a rigid exchange rate,” he said.

Many U.S. legislators, businesses and labor groups say the Bush administration is not acting aggressively enough on the issue.

A group of Republican and Democratic senators on Friday said the administration should consider filing a complaint against China at the World Trade Organization if it does not agree to stop holding its currency within a narrow band around 8.3 yuan to the dollar. Mr. Snow, who continues his talks with Chinese leaders today, has indicated that a mere widening of that band might be acceptable for now.

China has held down the yuan in two ways — through the purchase of more than $200 billion in dollars and U.S. securities recently and by dramatically boosting its exports to the point that China has become the biggest contributor to record U.S. trade deficits — increasingly implicating itself in the loss of U.S. manufacturing jobs.

Economists estimate that China’s currency would appreciate by 15 percent to 40 percent if it removed the peg and allowed the yuan to float freely in currency markets. But they say that even without the currency peg, China would remain a formidable competitor to manufacturers around the world because of its seemingly endless supply of skilled and low-wage workers.

The impact China and other Asian exporters have had on U.S. manufacturers has been dramatic in recent years. While U.S. manufacturing shrank by 7 percent and shed 2.7 million jobs since 2001, during one of U.S. industries’ deepest recessions, Chinese industrial production soared by more than 50 percent, enabling the country’s economy to grow at rates exceeding 8 percent.

Economists say that while there is no doubt China has increased market share at the expense of American businesses, it is impossible to say exactly how many of the U.S. job losses and bankruptcies are the result of inroads made by China.

Nevertheless, the proliferation of Chinese products in the United States has been a chronic complaint of U.S. businesses and labor groups, who are increasingly mobilizing for the 2004 presidential election. Mr. Snow and other Bush Cabinet members heard stories about the decimation of U.S. manufacturing jobs during their trips around the country last month to promote Mr. Bush’s tax cuts.

Before leaving on his visit to Asian capitals this week, Mr. Snow said the currency issues would be at the top of his agenda, but privately he told American businessmen not to expect any immediate relief.

Among the objections raised by Chinese leaders, according to Mr. Snow, are worries that any move to float the yuan might backfire by causing a run on the currency as Chinese businesses and individuals rush to buy previously prohibited foreign holdings.

Business leaders believe the administration is hesitant to pressure China now because of the sensitive role it is playing in talks with North Korea. Also inhibiting the administration are the extensive investments U.S. businesses have made in China in recent years.

Computer companies like Dell have been able to hold down costs by manufacturing parts in China, while a cornucopia of inexpensive and high-quality Chinese-made merchandise from clothing to electronics has been a secret of success for U.S. discount retailers like Wal-Mart.

Given the boon to China’s economy, officials in Beijing yesterday were in no hurry to change, noting that the yuan’s fixed exchange rate helped China weather the 1997-98 Asian financial crisis.

“A stable yuan is beneficial to the development of China, and of Asia,” Kong Quan, a Foreign Ministry spokesman, told reporters.

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