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Politics: Economics Take Fore in U.S.-China Tensions

February 19, 2010

The Wall Street Journal
February 17, 2010

The mounting political tension between U.S. and
China is poised to take on a more pronounced
economic component -- with Washington, in coming
months, expected to press China over what officials see as an undervalued yuan.

This week, China is facing off with the U.S. over
President Barack Obama's planned meeting Thursday
with Tibet's exiled spiritual leader the Dalai
Lama, whom Beijing alleges has pushed for Tibetan
independence from China. That comes on top of
January's announcement that the U.S. would sell
$6.4 billion worth of arms to Taiwan, which
Beijing claims as part of its territory, and
continuing sparring over a cyberattack on Google
Inc. widely seen as originating in China. The two
sides have also disagreed over whether to
sanction Iran over its nuclear program.

But for U.S. officials, China's exchange rate is
emerging as a top concern. President Obama and
other administration officials argue that the
Chinese currency is undervalued. That makes
Chinese exports artificially cheap in terms of
other foreign currencies, contributing to the
U.S.'s large trade deficit with China and, they
say, depriving Americans of jobs.

Also on the economic front, U.S. officials have
taken notice of increasing, vocal concerns among
U.S. multinationals over what these companies
view as growing protectionist trends in China.
For years, these companies have acted as a ballast for stable bilateral ties.

"We expect to see actions by China" to help
rebalance global trade flows, a White House
official said. If Beijing fails to act, that
"will put greater and greater pressure on the U.S. to respond."

"We have 10% unemployment and China is racking up
huge trade surpluses with an undervalued currency
-- the politics [of that] are very tough," said
Kenneth Lieberthal, a former Clinton
administration official who now heads Brookings
Institution's John L. Thornton China Center in Washington.

Officials and analysts in both countries say
economic codependence and shared strategic
interests over such issues as North Korea and
nuclear nonproliferation are likely to ensure
that relations generally remain cooperative.
Underscoring that, five U.S. warships, including
the aircraft carrier USS Nimitz, docked in Hong
Kong on Wednesday for a four-day rest stop.

But lately, many elements of U.S-China
cooperation have been put to the test. While the
value of the yuan has long concerned U.S.
politicians and business, the rhetoric is
heightening as the U.S. continues to grapple with
high unemployment and China hits new growth benchmarks.

In a meeting with Senate Democrats this month,
Mr. Obama vowed to "get much tougher" with China
on trade rules, including currency rates, to
ensure that U.S. goods weren't at a competitive
disadvantage. The U.S. says its trade deficit
with China totaled $226.83 billion in
2009—narrower than the annual deficits from 2006
to 2008, but still the U.S.'s largest imbalance with any nation.

The administration has already acted on some
trade issues. In September, U.S. Trade
Representative Ron Kirk announced tariffs on
certain tires made in China, in response to a
surge in Chinese tire exports to the U.S. The
next big test comes in April, when, under the
Omnibus Trade and Competitiveness Act of 1988,
the U.S. will decide whether to label Beijing a "currency manipulator."

Such a move technically wouldn't result in any
U.S. actions against China. But invoking the
rarely used act-- no countries have been named
since 1994 -- would likely infuriate Beijing and
give Congress new ammunition to press for concrete action against China.

A senior Treasury Department official said no
decision on the matter has been made.

Some U.S. lawmakers are also considering steps to
address the Chinese-currency issue. Sen. Chuck
Grassley, an Iowa Republican, will "evaluate
legislative options" if the administration
doesn't label China a manipulator, said Grassley spokeswoman Jill Kozeny.

Nicholas Lardy, a China scholar at the Petersen
Institute for International Economics in
Washington, argues that the yuan is currently
undervalued "in the neighborhood of 25%, and
perhaps as much as 30%," against the currencies of its trade partners.

China began letting the yuan appreciate against
the dollar incrementally in July 2005, after
years of keeping it effectively pegged to the
greenback. The yuan gained about 21% against the
dollar from July 2005 to July 2008, when Beijing
halted the rise, as the global economic crisis
sapped demand for its exports and fueled worry
about a domestic economic slowdown.

Many analysts think Beijing might be willing to
partially unshackle the yuan again because of
concerns that its stimulus-fueled economy risks
overheating, making inflation a concern. A
stronger Chinese currency would put downward
pressure on prices by lowering China's costs for
imported raw materials and increasing its
purchasing power for foreign goods. A stronger
yuan would also likely trim exports, and thus slow the economy.

Beijing would have to weigh the advantages of
preempting economic overheating with the risks of
slowing the economy too much. Any currency
movement would almost certainly be gradual, given
a stronger yuan's potential impact on Chinese
exports and jobs. Too much foreign pressure on
China could prompt the country to be more
intransigent on the exchange rate, which Beijing views as a domestic issue.

"I don't think China is likely to revalue the
yuan before April, regardless of whether the U.S.
labels China a currency manipulator," says Ji
Zhu, an economics professor at the Beijing
Technology and Business University. "It won't be
forced to make decisions simply based on some
pressure from the U.S." He said China's priority
remains ensuring stability. "It needs to maintain
a trade surplus and continued export growth, to promote job creation."

U.S. multinationals, meanwhile, have been
complaining to the Obama administration about
proposed rules issued by Beijing late last year
that would set a list of preferred suppliers for
the multibillion-dollar government procurement
market and give preferred treatment to companies
whose products are deemed to include adequate
levels of local innovation. U.S. and other
foreign companies fear this could put them at a
disadvantage to Chinese players, and compel them
to shift intellectual property to China.

Nineteen U.S. trade groups, including the U.S.
Chamber of Commerce and the National Association
of Manufacturers, sent a letter in late January
to Obama cabinet members saying the Chinese
programs "threaten to exclude a wide array of
U.S. firms from a market that is vital to their
future growth and ability to create jobs here at
home." The letter urged the officials to make the issue a "strategic priority."

* Sue Feng in Beijing and Bai Lin in Shanghai contributed to this article.
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