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Thursday, June 30, 2005

China Is America's Biggest Threat




WASHINGTON - The threat of a trade war with China diminished Thursday when two U.S. senators agreed to postpone a pending vote on legislation that would impose a 27.5 percent tax on all Chinese-made products unless the Asian power revalued its currency.

Sens. Lindsey Graham, R-S.C., and Charles Schumer, D-N.Y., announced their decision after a closed-door meeting on Capitol Hill with Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow.

"They have convinced us that the likelihood of real progress with China on currency revaluation is very real and could occur in a very short while, the next few months," Schumer told reporters. "We have agreed in delaying a vote on our bill."

Added Graham, "We're showing flexibility to create a win-win situation."

The senators' decision to postpone the expected July vote until late fall provides some breathing room for the Bush administration, which has tried quiet diplomacy to encourage China's move to an openly traded currency. So far that approach has been fruitless. On Sunday, Chinese Premier Wen Jiabao reiterated that China is in no hurry to revalue its currency and will do so, if at all, only after careful study on its own timetable.

In a written statement after the meeting, Snow said that Chinese leaders "have agreed that it is in their best interest to adopt greater exchange rate flexibility."

The issue of China's currency and what, if anything, Washington should do about it is one of many arguments raging in the nation's capital over how to respond to the Chinese challenge. With China's economy growing by almost 10 percent a year, it's increasingly perceived not as America's next great rival on the world stage, but as America's rival today.

Already China competes with the United States for scarce commodities such as crude oil. Along with the United States, it's responsible for growth in an otherwise moribund global economy. As Washington debated whether China will be friend or foe, last week China's state oil company bid to acquire California oil giant Unocal.

In that context, the Graham-Schumer legislation drew wide support in Congress, where 67 senators endorsed it. House members led by Reps. Tim Ryan, D-Ohio, and Duncan Hunter, R-Calif., back a similar effort. Most lawmakers do so recognizing, as Schumer concedes, that the measure is largely symbolic, intended more to send a message to Beijing about playing fair than to become U.S. law.

Schumer and Graham are trying to prod China to play by the same free-market rules as other trading powers. For a decade, China's government has fixed the exchange rate of its currency, the yuan, at about 8.3 to the dollar. All other major currency values are set by markets. China's fixed exchange rate makes its exports cheaper overseas, giving it what U.S. analysts believe is an unfair trade advantage.

After hearing testimony from experts that the Chinese yuan was undervalued vis-a-vis the dollar by 15 percent to 40 percent, the two senators settled on a middle figure of 27.5 percent to levy on each Chinese import until China revalues.

But imposing trade sanctions on China wouldn't bring back U.S. jobs that have been lost to low-wage competition in this era of economic globalization, Greenspan warned in testimony before the Senate Finance Committee on June 23.

"At only slightly higher prices than prevail at present, U.S. imports of textiles, light manufactures, assembled computers, toys and similar products would in part shift from China as the final assembler to other emerging-market economies in Asia, and, perhaps, in Latin America as well," he said. "Few, if any, American jobs would be protected."


Moreover, China had threatened to respond in kind to any U.S. trade sanctions, heightening fears of a damaging trade war between the world's largest economy and its fastest-growing one. That could hurt Americans in many ways - perhaps even curbing the housing boom that's powering the U.S. economy.

Here's how. China, along with other Asian governments, has financed America's mammoth trade deficit by buying U.S. Treasury bonds. Through the end of June, China held $338 billion of them.

This has become problematic for the Fed. On Thursday, it raised short-term interest rates by another quarter-point to 3.25 percent, the ninth consecutive time it's done so in an effort to slow U.S. consumption and contain inflation.

Traditionally, long-term lending rates rise with hikes in short-term rates, but not in the current cycle, in part because the foreign purchases of Treasuries are pumping enough capital into the U.S. economy to keep long-term borrowing rates low. Those low long-term rates are fueling the housing boom that many analysts fear is an overheated bubble.

If China stopped or cut back sharply in purchases of Treasuries, long rates would rise, housing prices might fall, and some borrowers could have trouble paying their bills, slowing the economy or even tipping it into recession.

Fearing such consequences, Greenspan and Snow have visited the two senators privately several times in recent weeks, urging them not to provoke Beijing so rudely, even as the two U.S. financial leaders have pressed China diplomatically for similar currency reforms.

On Thursday the foursome invited cameras to record the start of their closed-door meeting in the Capitol - another way to send a message to Beijing that everyone in Washington takes this issue seriously, though they disagree on what to do about it. The message: China should act on its own, before Washington does.

--Knight Ridder Newspapers, June 30, '05

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