[New York Times] October 30, 2003 Treasury Chief Says China Isn't Manipulating Its Currency By KENNETH N. GILPIN
Seeking to avoid the onset of what could turn into a trade war with China, Treasury Secretary John W. Snow told senators today that Beijing was not manipulating its currency exchange rate to gain an unfair advantage over American manufacturers. But in practically the next breath, Mr. Snow acknowledged that China did not meet the technical requirements established under Omnibus Trade and Competitiveness Act of 1988, "the same finding for nearly 10 years of past reports." Under the terms of the act, if the Treasury finds a country has been unfairly manipulating its currency, the administration must begin negotiations with the offending country to correct the problem. But if those discussions fail, the United States could take retaliatory trade action. In his opening remarks before the Senate Banking Committee, Mr. Snow also made his strongest statement yet in support of the dollar. "A strong dollar is in the U.S. national interest," he said. Mr. Snow's statement was a message to the foreign-exchange market that it had misinterpreted the meaning of a statement issued last month by the finance ministers of the Group of 7 leading industrialized countries at a meeting in Dubai. Currency traders had interpreted that statement as being consistent with the Treasury secretary's suggestions earlier this year that the Bush administration would not be displeased to see the value of the dollar decline as a way of increasing American exports and thereby reducing its enormous trade deficit, which this year will be around $550 billion. "Snow posted a much stronger defense of the strong dollar than many expected," said Jeremy P. Fand, senior proprietary trader at WestLB, a German bank. Mr. Snow made his comments about the dollar against the backdrop of a government report today that showed that the American economy expanded at an annual rate of 7.2 percent in the third quarter, the biggest quarterly increase in almost two decades. The dollar rose moderately in the wake of Mr. Snow's testimony. This afternoon in New York, the dollar was quoted at 108.75 Japanese yen, up from 108.23 yen late Wednesday. Meanwhile, the euro slipped to $1.1631, from $1.1675 on Wednesday. China has come under increasing scrutiny - and criticism - because for the past decade it has chosen to peg its currency, the yuan, at about 8.28 to the American dollar. At that rate, many analysts estimate the yuan may be undervalued by anywhere from 15 percent to as much as 40 percent against the dollar. Even though many American companies have established operations in China and export goods back into the United States from there, manufacturers and lawmakers in this country argue that a pegged currency gives China an unfair trade advantage, costing millions of American jobs. Through the first eight months of this year, China posted an $88.3 billion trade surplus with the United States. Earlier this week, Commerce Secretary Donald L. Evans said that surplus could reach $130 billion for all of 2003, up sharply from the $103 billion surplus recorded for all of 2002. But in his testimony today, Mr. Snow pointed out that even as China's bilateral surplus with the United States has mushroomed, its global current account surplus has been declining. For the first eight months, China's global current account surplus, which measures trade in goods and services, amounted to $9 billion. Members of the Senate panel were given copies of Mr. Snow's conciliatory remarks prior to the start of the hearing. In a reflection of the toll the decline in manufacturing has taken on employment around the country, senators from both parties reacted with disappointment or even anger before the Treasury secretary began his testimony before them. "I am disappointed that this Treasury report fails to acknowledge the seriousness of the Chinese currency peg," said Senator Elizabeth Dole, Republican of North Carolina. Senator Jack Reed, Democrat of Rhode Island, said: "We shouldn't scapegoat China, but we shouldn't give them a pass, either. Unfortunately, the report today does little to point in the direction of a policy. It might be a diagnosis, but it's certainly not a prescription for what we should do." Already pending in the Senate is a a bill sponsored by Senator Richard J. Durbin, Democrat of Illinois, Mrs. Dole and four of their colleagues that would levy a 27.5 percent tariff on imports from China unless it adjusts its exchange rate. Based on the $103 billion trade deficit the United States ran with China last year, such a tariff, if implemented, would be the equivalent of a $28 billion tax on Chinese imports. "The time for diplomatic niceties is past," said Senator Charles E. Schumer, Democrat of New York. Mr. Schumer, who is another sponsor of the tariff legislation, labeled the Treasury report a "whitewash." "The administration needs to take a firm line with the Chinese on the currency issue," he said, "or American jobs will continue to go overseas faster than children leavin a classroom on the last day of school." In his prepared remarks, Mr. Snow urged the Chinese to make adjustments. "Given China's strong growth and substantial foreign-exchange reserves, following a series of economic reforms, China now has the opportunity to show leadership on the important global issue of exchange rate flexibility," Mr. Snow said. China, which could take retaliatory steps that would hurt the United States, thus far has responded to American criticism by increasing its purchases of goods from American companies that have invested heavily in China. Boeing is widely expected to announce a deal soon for the sale of 30 narrow-bodied 737 aircraft. And General Electric is looking to complete a deal to supply China's Avic 1 Commercial Aircraft Company with engines for a 100-seat regional jet. Potential Chinese retaliatory measures include imposing sanctions against American imports, revoking licenses issued to American companies to operate in the Chinese market and stopping the purchase or selling off some of its vast holdings of United States Treasury securities. China is the second-biggest buyer of Treasury securities, after Japan. A decision to unload at least some of its holdings would likely put upward pressure on American interest rates, jeopardizing the sustainability of what now appears to be an accelerating economic recovery. Senator Jon Corzine, Democrat of New Jersey, pointed out during the hearing today that to finance the American current account deficit, the United States needs to borrow roughly $2 billion a day.
