Wednesday, May 10, 2006

U.S.: China Not Manipulating Currency

This is off Yahoo News:

WASHINGTON - The Bush administration on Wednesday announced it would not brand China as a country that was manipulating its currency to gain unfair trade advantages.

The decision came in spite of growing pressure in Congress to take punitive action to deal with a U.S. trade deficit with China that hit a record $202 billion last year.

Treasury Secretary John Snow did say he was "extremely dissatisfied" with the pace of China's currency reforms.

American manufacturers contend that China has been artificially keeping its currency devalued by as much as 40 percent against the dollar, giving Chinese manufacturers a huge competitive advantage against U.S. products.

However, the administration said in the latest currency report to Congress that it did not believe China technically met the definition in the law of a currency manipulator.

Can you say something smells here? Continuing on:

Critics of China's trade policies were quick to attack the decision.

"By failing to designate China as a manipulator in this report ... the United States comes off as a paper tiger unwilling to stand up for its domestic industrial sector," said Auggie Tantillo, executive director of the American Manufacturing Trade Action Coalition, which represents U.S. textile and clothing companies.

"Secretary Snow has been consistently rolled by the Chinese government in his years-long but unsuccessful effort to get China to take action on its highly undervalued currency," said Kevin Kearns, president of the U.S. Business and Industry Council, which represents many medium and small-sized manufacturing companies.

The report noted that China last July announced it was abandoning a fixed link of the yuan's value to the dollar, although since that time the yuan has risen in value by only about 3 percent.

"We are extremely dissatisfied with the slow and disappointing pace of reform of the Chinese exchange rate regime," Snow said.

"We are not satisfied with the progress made on China's exchange rate regime and we will monitor closely China's progress every step of the way," he said.

The currency report, which the administration must present to Congress every six months, was delayed by a few weeks, until after Chinese President
Hu Jintao and President Bush discussed the currency dispute during a White House meeting on April 20.

First question I have to ask is what was said between the meetings by Chinese President Hu Jintao, and President Bush? By artificially keeping the yuan low, the Chinese are able to sell more products to the United States, thus expanding their own manufacturing capacity, and causing their own economy to grow. Of course, the Chinese have also been getting U.S. dollars from American consumers, of which they've been investing in our growing debt, through the purchase of U.S. Treasury bonds. But this situation of the Chinese exporting cheap manufactured goods into the U.S. can't last forever. With Americans buying more imported goods than exporting goods to the rest of the world, more American dollars are floating in world currency market. The dollar's value is going to have to drop, causing prices for American exported goods to fall. At the same time, the value of the Chinese yuan should rise, causing prices for Chinese imports into the U.S. to rise. But we really haven't seen this happen yet. Prices have started to rise here in the U.S., but I would have to wonder if such increases were a result of the increased oil and energy costs.

I would guess that the Chinese still believe they could continue expanding their economy on the backs of the U.S. consumer. The Chinese believe that the American consumer would continue to purchase whatever goods they sell to the U.S. And the Chinese may be willing to threaten the Bush administration with the Chinese dumping of the dollar, if the U.S. makes demands for the China to revalue the yuan. So far, the Bush administration still believes in old "strong dollar" policy, where the U.S. dollar is the world's de facto currency. Is the Bush administration willing to spark sharp rises in prices on imported goods, perhaps causing inflation to rise within the U.S., and thus creating an economic recession?

But the dollar's value has been dropping. For years, foreign governments have been happily gobbling up U.S. bonds in exchange for selling cheap goods into the U.S. And American consumers have been happily buying up these imported goods with their dollars, sending those dollars overseas. There comes a time when foreign governments have had enough of accumulating dollars, and would be worried that the value of their U.S. investments would drop, if inflation starts to rise in the U.S. A second problem could be the U.S. economy itself. With more American jobs being outsourced, especially white collar and professional class jobs, American consumers may not be willing or able to purchase as much imported goods as they were years before. Foreign producers would be unable to sell their goods in the American market, and thus they would have to cut back on their production. We could see a situation where an American recession could trigger a greater world-wide recession...or perhaps even a depression?

So this story is troubling to me. I get the impression that the Chinese want to keep the status quo going on for now, and the Bush administration is willing to go along with it--both for their own self-centered reasons. And as long as this continues on, a day of reckoning draws closer, where the crap will hit both the Chinese and American fans.

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