The Bush administration yesterday took its biggest step yet to slow momentum toward a trade war with China by warning the Asian giant that it has only a few months to stop artificially fixing its exchange rate against the dollar.
The move — which helped spark a rally on Wall Street, where worries about a trade war are growing — is aimed at blunting the rapidly growing appeal of legislation imposing stiff tariffs of nearly 30 percent on all Chinese goods.
A bipartisan bill to retaliate against the Chinese has gained critical momentum in Congress this year and could trigger a trade war that economists say could be destructive to the U.S. and global economies.
Both the Treasury’s move to force China to raise the value of its currency and the tariffs — which have been threatened if the nation does not do so — would raise the cost of a wide array of consumer goods — from TVs to clothing — that Americans have grown accustomed to getting at steep discounts resulting from China’s cheap cost of labor.
China is the chief supplier of low-cost goods displayed in Wal-Mart and other popular discount stores. The flood of Chinese imports has bloated the U.S. trade deficit by an unprecedented $200 billion in the past year.
A principal reason that the Chinese have been able to undercut other goods makers is the government’s policy of fixing its currency at 8.28 yuan to the dollar — a level that most economists say is artificially low and amounts to a major subsidy for Chinese exporters and American consumers.
The Treasury Department has never previously found China’s practice of fixing its currency to be illegal manipulation under the U.S. trade laws, but yesterday it warned for the first time that if China continues the practice, it will be cited for violations in the future.
The next Treasury report on the exchange policy is expected in the fall, giving China only months to comply. Although Chinese officials have said they want to move to a more flexible currency, they also have warned recently they will not respond to such pressure from the United States.
“I’m concerned there will be mounting protectionist pressure in the U.S.” unless China moves quickly to change its policy, said Treasury Secretary John W. Snow in issuing the administration’s warning yesterday.
“I’m confident that if Congress sees China move,” it will help “ward off protectionist pressures,” he said.
Mr. Snow gave China the option of taking half measures that would raise the value of its currency without allowing it to float freely in the world markets, as does the dollar and other major currencies.
Mr. Snow said China’s financial system is strong enough to support a change, as a result of financial reforms enacted in the past two years, but it does not have to move immediately to a free exchange rate to satisfy U.S. demands.
“Let me make it clear we’re not calling for a float. We calling for flexibility,” he said. “China will be the judge” of how far it should go to deregulate its currency, he said.
Mr. Snow also left himself room to fudge on the fall deadline if China’s response is ambiguous. “It should be a real step. It should be something the world could see and know that China means business.”
Mr. Snow noted that Chinese policies “are highly distortionary and pose a risk to China’s economy, its trading partners and global economic growth.”
If China is found in violation in the fall, the United States could take retaliatory action under U.S. trade laws or begin negotiations with Beijing on a remedy. Yesterday’s action follows the administration’s move last week to reimpose some restraints on a flood of Chinese clothing imports this year.
China critics yesterday called Treasury’s move “weak,” but it appeared to have the intended effect — at least initially — of deflating momentum in Congress for retaliatory legislation.