Global Policy Forum

By Elizabeth Becker and Edmund L. Andrews

With unemployment high and American manufacturers reeling from three years of misery, politicians and businesspeople around the country have found a villain to blame for these troubles: China, or more specifically its currency.

In South Carolina, the Republican governor, Mark Sanford, cites the currency, the yuan, as posing a major threat to his state's struggling textile industry by making Chinese exports unreasonably cheap. In Erie, Pa., executives and workers at scores of industrial companies are planning a loud protest on Labor Day over "unfair competition" — and one of the biggest targets will be the seemingly obscure matter of the yuan. And in Washington, the Bush administration is gearing up to put direct political pressure on China next week when Treasury Secretary John W. Snow makes a highly publicized trip through Asia. The subject was near the top of the agenda when President Bush met with his economic team two weeks ago in Crawford, Tex.

The issue is the value of the yuan, which the Beijing government pegs to the dollar rather than allowing it to float in world currency markets. Critics say that keeps the yuan undervalued by as much as 40 percent, enabling Chinese manufacturers to flood the United States with products at prices that homegrown companies cannot match. Though Chinese exports have been growing at the expense of American manufacturing jobs for years, the volume of the complaints has risen with the unemployment rate — and with the approach of national elections next year. And no matter what it does, the White House is on treacherous ground.

If the administration does not push China hard enough, it risks losing crucial support in important electoral districts. But if it pushes too hard, it could alienate China at a time when the United States needs Beijing's help in containing North Korea. Then there is the risk of alienating American consumers, who benefit from inexpensive Chinese goods. "This is probably the hottest single trade issue," said Representative Phil English, Republican of Pennsylvania and head of the Congressional steel caucus. "I believe the administration would be making a big mistake if it ceded the high ground on this issue to some of Mr. Bush's competitors."

In a blunt letter to President Bush last month, 16 Republican and Democratic senators and representatives complained that China was undercutting American factories by intentionally keeping its currency undervalued. The lawmakers, from Democrats like Senator Charles E. Schumer of New York to Republicans like Mr. English and Senator Elizabeth Dole of North Carolina, demanded that Mr. Bush press China to adopt a free-floating currency and to let the yuan rise in value. "The fragile coalition for free trade is weakening because of the huge loss of manufacturing jobs in most parts of the country," Senator Schumer said. "Correcting the exchange rate with China is the perfect way to stem some loss of jobs without violating international trade rules."Senator Joseph I. Lieberman, Democrat of Connecticut, signed the letter and has made the issue part of his presidential campaign platform.An undervalued currency makes a country's exports cheaper than they might otherwise be, which in turn puts increased pressure on companies in countries with stronger currencies.

During Mr. Snow's two days of meetings next week, administration officials say he will urge China's leaders to rethink their long-held policy of locking the yuan at a fixed exchange rate of 8.28 to the dollar. Still, the administration is reluctant to anger China. For one thing, the United States will commence six-country talks in Beijing on Wednesday over how to deal with North Korea's nuclear program.Beyond that, administration officials say the economics are far more complex than they first appear.

Some are worried that an abrupt rise in China's currency might set off a deflationary spiral there that would imperil China's troubled banking system. China's central bank announced today that to shore up its system it would raise the level of deposits required of commercial banks. Administration officials also note that China is one of few engines in the world economy that is still running at top speed. Putting a brake on that engine could create as many problems as it solves. And they know that a jump in the yuan would lead to unpleasant price increases on everything from clothing to household appliances in the United States.As a result, administration officials are moving more cautiously than many manufacturers would like. The message to China "will be explicit" that flexibility would be in China's self-interest and "very clear," a senior administration official said today. But the message will be diplomatic.

For the last nine years, China has maintained the yuan's exchange rate against the dollar by buying or selling dollars when necessary, a policy aided by the fact that China has much stricter currency controls than most countries. Consequently, the yuan has moved in lock step with the dollar, even though China's trade surplus and its foreign reserves have grown enormously.

Defenders of China's policy note that it has at least been consistent. The yuan rose in line with the dollar during the late 1990's, even after other countries drastically devalued their currencies amid the Asian financial crisis. The International Monetary Fund has been watching the issue, and officials said today that they also believed that China should show "greater flexibility" toward its exchange rate.

But Beijing has made it clear that it will make only token gestures to the administration. At most, Chinese officials may offer Mr. Snow a loosening of some currency controls or a promise to begin a formal examination of its policies.

That seems unlikely to damp the rising anger in America's industrial heartland. Governor Sanford of South Carolina and Jennifer M. Granholm, the Democratic governor of Michigan, both said that the exchange rate had become an issue in their states. "In the Textile Belt, there are a number of governors who are acutely aware of the problem," Mr. Sanford said in an interview. "But our ability to impact currency rates halfway across the globe is frankly nonexistent."

For her part, Governor Granholm said that the issue was so important to retaining manufacturing jobs in her state that she would make it one of the litmus tests as she decides which candidate to endorse in the Democratic presidential primary.

C. Fred Bergsten, director of the Institute for International Economics in Washington, said that the domestic pressure against Chinese imports would only increase. "If nothing is done, you could get an outbreak of protectionism here against China," Mr. Bergsten said in an interview.

Few American consumers have been oblivious to the increasing ubiquity of "Made in China" labels. The trade deficit with China has exploded to over $100 billion, thanks to market-opening trade agreements and to China's seemingly limitless supply of extremely low-wage workers, in addition to the role of the yuan. Chinese exports to the United States have doubled to $125 billion in 2002 from $62 billion in 1997.American exports to China, by contrast, have crept up only modestly over the same period, to $19 billion from $13 billion.

Phil Tredway, president and owner of Erie Molded Plastics Inc. in Erie, Pa., is among the many manufacturers bitterly complaining about Chinese exchange rates. "Our customers have a market without borders and sourcing without borders, and we know that," Mr. Tredway said today. "We can compete against China's low labor costs, and we can compete with them if they play by the rules. But we cannot compete with them if they have a 20 percent to 40 percent currency advantage."

At Erie Molded Plastics, a 21-year-old business that makes products like electrical connectors and plastic bottle caps, sales have plunged 20 percent in the last three years, to about $8 million. "I'm a Republican and a strong supporter of President Bush," Mr. Tredway said. "But the administration doesn't have any idea how many jobs have been lost because of this."

But international brow-beating over exchange rates can be risky and dangerous for all countries concerned. Charlene Barshefsky, who was the United States trade representative under President Bill Clinton, said that China's exchange rate was a legitimate issue, but she warned against formal accusations of unfair trade practices. "These trade actions are very costly to bring and success is not assured," she said. "The U.S. is now getting as good as it gets and has become the most prominent country against which antidumping rules are brought, to the detriment of our exporters."

Regardless of the risks, manufacturers are planning to force the issue as the presidential and Congressional election campaigns intensify. Ernest H. Preeg of the Manufacturers Alliance, a business-supported policy research group, made it clear that many companies are disgruntled with the administration on this issue. "Manufacturers are not going to let the administration fudge the issue," he said. "Just when we're getting hit by the recession, we're getting clobbered by currency manipulation. That's unfair."