- The Washington Times - Tuesday, June 7, 2005

The record U.S. trade deficit will not improve as much as Congress expects if China stops linking its currency to the dollar, Federal Reserve Chairman Alan Greenspan said yesterday.

Mr. Greenspan’s remarks came as House Ways and Means Committee Chairman Bill Thomas of California called for increased congressional pressure on China in light of Beijing’s resistance to calls for a more flexible exchange rate.

Many in Congress believe the move is needed to curb the exploding trade deficit with China which, at $160 billion, represents a quarter of the overall trade deficit of $670 billion.

The dollar has fallen against all major currencies in the past three years except China’s because of its fixed currency regime. Even so, the trade deficit has bloated to unprecedented levels that raise concern at the Fed and elsewhere.

“It certainly is not going to be a major impact” on the deficit if China changes its regime, Mr. Greenspan told a gathering of central bankers in Beijing by satellite Monday night.

He said that while exports from China might decline some, other developing countries with low wage rates like China’s would fill in with increased exports to the United States.

In other remarks that moved financial markets yesterday, Mr. Greenspan conceded that an unusual drop in long-term interest rates in the past year — even as the Fed raised short-term rates — could be a market signal of impending recession in the global economy as it has been in the past.

But he argued it also could be consistent with economic growth if it is the result of other trends, such as a global surplus of savings as people preparing for retirement around the world seek steady long-term investments and bid up the price of long-term bonds.

Mr. Greenspan’s potentially controversial remarks about the China trade deficit are in line with Chinese officials and economists who point out it is China’s low wages, which are only a fraction of U.S. levels, that are behind the proliferation of exports to the United States, not the official exchange rate.

Labor typically constitutes two-thirds or more of a manufacturer’s costs.

Still, Mr. Greenspan repeated his opinion that China should stop fixing its currency at 8.28 to the dollar because it is fueling inflationary pressures within China. “Allowing revaluation in some form is very much to the advantage of the Chinese, and I am certain they will take it on reasonably soon,” he said.

The head of China’s central bank, Zhou Xiaochuan, speaking at the same Beijing conference, said there is “too much expectation” for a change of regime. He insisted that the Asian giant is not ready, as it needs to keep reforming its weak financial sector.

His assertion contradicted U.S. Treasury Secretary John W. Snow, who said last month that China is ready for at least a one-time move raising the yuan by 10 percent or more against the dollar.

“We have to let China know, probably from a legislative position, that the administration’s recent exhortations are supported by the Congress,” Mr. Thomas said in remarks here yesterday to the U.S. Chamber of Commerce.

The California Republican did not say what legislation he has in mind. The House has not acted on the currency issue, though the Senate signaled overwhelming support this spring for a measure imposing stiff tariffs on Chinese products if Beijing does not act.

Mr. Greenspan’s conclusion that a more flexible currency regime would not help much to tame the burgeoning U.S. trade deficit is echoed by some analysts, although other economists argue that it is the only thing that will curb the deficit in the long run.

China’s role in trade increasingly is to manufacture parts or do the final assembly of products for sale in the United States by American, Japanese and Korean corporations.

The hundreds of large U.S. corporations that depend on China to help lower their labor costs and increase profits — including financially ailing General Motors Corp. — will not stop outsourcing anytime soon even if China’s currency appreciates, said Joseph P. Quinlan, chief investment strategist with Bank of America.

U.S. policies that raise the cost of Chinese imports would “disrupt” their vital supply chains and “penalize U.S. firms and their shareholders” just as much as they do the Chinese, he said. “That’s a fact lost on many policy-makers.”


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