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China: US Bosses Step Up Yuan Row

BBC
June 18th, 2003

A powerful industrial lobbying group is calling on the US government to take China to the World Trade Organisation (WTO) over its fixed exchange rate policy.

The National Association of Manufacturers (NAM) has said it plans to file a trade complaint with the US Trade Representative, which would force trade officials to consider an official response.

The Bush administration would have to decide whether to take the filing to the next stage by making a complaint of unfair trade practices to the WTO.

China is facing growing criticism from trade partners, led by the United States, that its imports are artificially cheap because its currency is pegged to the US dollar at the wrong rate.

Election issue

The Chinese currency is pegged at 8.3 yuan to $1. Critics believe the yuan should be allowed to float, with some economists saying about 5 yuan to the dollar would more realistic.

America's trade unions and manufacturers blame cheap Chinese imports for destroying US jobs.

Calls for a revaluation of the yuan are gathering steam in the build up to the 2004 US presidential election.

The Bush Administration is keen to win blue collar votes from traditionally Democrat-supporting manufacturing districts.

China racked up a trade surplus with the US of $103bn in 2002, overtaking Japan as the country with the largest surplus.

US Treasury Secretary John Snow called on China to revalue its currency during a recent visit.

Building pressure

Chinese officials initially rejected the idea but later conceded that a revaluation made sense, though they were careful not to say when.

NAM President Jerry Jasinowski said that by throwing its weight behind other groups in a trade complaint - known as a Section 301 filing - the NAM would "demonstrate broad-based support for the (Bush) Administration's efforts to force China to play by the rules".

"They are trying to send a signal as much to the Chinese as to us," the Financial Times quoted Grant Aldonas, US Undersecretary for Commerce as saying.

US lawmakers also stepped up pressure on the Bush Administration by lodging a Congressional resolution on Wednesday accusing China of "illegal currency manipulation".

The resolution said that unfair exchange rates from China and other East Asian countries had cost 2.7 million US manufacturing jobs since 2000 by undercutting US goods and luring away investment.

Unpredictable outcome

A Section 301 filing could ultimately lead to WTO sanctions against China, if the trade umpire agreed that the currency peg was unfairly distorting trade.

But some economists have warned that a revaluation of the yuan might be harmful to US consumers, who benefit from cheap Chinese goods. Retailer Wal-Mart, for instance, imports more than $10bn of goods a year from China.

US firms with factories in China would also suffer if the market for their exports dried up or investments became more expensive.

The most dramatic scenario envisaged by economists is that a freely floating, internationally tradable Chinese currency could lead to massive capital flight from China, bringing down its rickety banking system and sparking social unrest.

Meanwhile, IMF chief economist Ken Rogoff on Thursday urged Asian nations to let their currencies rise gradually to help the US avoid a sharp fall in the dollar brought about by its trade deficit.





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