- The Washington Times - Monday, May 21, 2007

Today, Treasury Secretary Hank Paulson convenes the second edition of his signature international economic policy initiative, the biannual Strategic Economic Dialogue between the United States and China. Accompanied by nine cabinet secretaries, Mr. Paulson will lead the U.S. team in the two-day dialogue. Chinese Vice Premier Wu Yi, who reportedly was so incensed over recent U.S. trade actions against China that she considered boycotting the meeting, will lead a delegation of more than a dozen senior Chinese officials, many of whom will confront a bipartisan delegation of equally incensed American legislators on Thursday.

There will be three elephants in the room, but only two will command everyone’s attention. The first is the U.S. trade deficit with China, which has increased from $57 billion in 1998 to $101 billion in 2003 to $233 billion last year. The second elephant is the exchange rate between the dollar and the Chinese yuan. Citing the explosion in the trade deficit as proof, nearly all Bush administration officials and members of Congress believe that the yuan, whose value is effectively fixed by China, is seriously undervalued. This, Americans argue, gives Chinese producers (including U.S. multinationals) an unfair advantage over U.S.-based firms by making Chinese goods much cheaper than they would be if China allowed the yuan to be more flexible, and, presumably, much stronger.

Americans argue that China’s currency manipulation adversely affects U.S. employment and manufacturing. While Chinese imports undoubtedly eliminate some jobs within the American economy, it is worth noting that the U.S. unemployment rate in 2006 was 4.6 percent, virtually the same as the 1998 rate (when the trade deficit with China was less than a quarter of last year’s). In 2003, the U.S. jobless rate was 6 percent. Between 2003 and 2006, the bilateral trade deficit increased by more than 100 percent, but the unemployment rate declined by nearly 25 percent. Meanwhile, U.S. manufacturing output in 2006, according to the Federal Reserve, was 20 percent higher than in 1998. Thus, neither the 2001 recession nor a quadrupling of the bilateral trade deficit could prevent U.S. manufacturing output from increasing at an average compounded rate of more than 2.25 percent per year between 1998 and 2006.

We enthusiastically endorsed the recent WTO cases involving intellectual property that the United States brought against China, which is a notorious, serial pirate. Economists are unable to agree on the “right” value of the yuan. Rather than argue about how many yuan a dollar should buy, we would prefer that the hard bargaining of U.S.-Chinese trade negotiations focus on resuscitating the potentially fatal Doha trade round. To the detriment of all, Doha is the elephant in the room that everyone will likely ignore.

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