Obama may face fury over Chinese currency

The Obama administration this week may have to fend off a fight with Democratic allies in Congress who are angry about what they say is China’s refusal to end trade-distorting policies and who are threatening reprisals that businesses fear could start a trade war.

China promised to effectively permit the value of its currency regime to rise this past spring to allay international criticism, but since then the yuan has barely budged. The Chinese yuan has risen only 0.6 percent against the dollar since the Asian giant instituted a more flexible regime in June — too little to prevent imports from China from surging to new highs in recent months.

Lawmakers from both parties are considering legislation that would penalize Beijing with stiff import tariffs on a wide array of goods if it does not allow a much stronger appreciation of the yuan. In two days of hearings in the powerful House Ways and Means Committee starting Wednesday, legislators likely will demand to know why the administration has put little public pressure on China.

“China’s trade policies are putting American businesses out of work and American workers out of jobs,” said Rep. Tim Ryan, Ohio Democrat and lead sponsor of the House tariff bill, which has at least 130 co-sponsors. “Our communities will not see a sustained economic recovery until we deal with this issue.”

Mr. Ryan insists that his bill, which authorizes the Commerce Department to impose duties on imported Chinese goods if China continues to depress the value of its currency, complies with World Trade Organization rules.

But Caterpillar, Microsoft and other major U.S. businesses that export to China — the fastest-growing U.S. export market — call the legislation protectionist and warn that it would spark a monumental trade war, as Beijing likely would retaliate against any U.S. efforts to restrict its exports.

Charles Blum, executive director of the Fair Currency Coalition, an alliance of manufacturers and labor groups pushing the tariff legislation, said the administration’s refusal to act puts the ball in Congress’ court.

Sentiment against the flood of imports from China is strong in Congress amid election-year pressures over jobs, and unions — a key Democratic constituency — have put the issue at the top of their wish list. Moreover, a significant loss of economic momentum this past spring, largely because of a surge in imports from China, is imperiling the re-election prospects of Democrats and has raised the profile of the issue.

Even businesses that oppose the tariff bill fear that Democrats will succeed at getting the measure passed in the House in coming weeks. They are hopeful, however, that the Senate will not have time to deal with the issue before the elections.

“The Obama administration and its Bush predecessor have lacked the political will to stop currency cheats like China,” Mr. Blum said.

The Treasury Department is conflicted on the issue, as burgeoning budget deficits are prompting it to sell record amounts of bonds each week, and China has been the biggest buyer with the largest cache of Treasuries totaling at least $800 billion.

Treasury Secretary Timothy F. Geithner is expected to get a grilling during an appearance before the House Ways and Means Committee on Thursday. Mr. Geithner hailed China’s small gesture at a meeting of the Group of 20 economic powers in Toronto in June, and has refused to take action against China for manipulating its currency to gain an advantage in trade.

The Commerce Department also declined last month to investigate whether China’s currency is undervalued in response to a trade complaint filed by business and labor groups. Another trade case raising the issue in connection with China’s green energy exports is pending before the White House office of the U.S. trade representative.

Sung Won Sohn, an economics professor at California State University at Channel Islands, said Washington should not expect too much from China. Its currency policy was always “political, not economic” in nature, he said. The emerging Asian nation never promised anything but gradual, evolutionary change.

“Social stability is an important goal of the government,” he said. “The government is concerned [that] a dramatic change in economic policies such as the exchange rate would fuel social and political instability because the country depends so much on exports for job creation.”

The small increase in the value of the yuan since June is about on track to bring the 2 percent to 3 percent gain predicted by many economists in the first year. That will do very little to erase the trade gap, economists point out.

Even a 21 percent rise in the Chinese currency between 2005 and 2008, when Beijing pursued a more flexible policy, failed to lower the yawning U.S. deficit with China, which is by far the largest worldwide at more than $230 billion a year.

The trade gap stems from more fundamental differences between China and the U.S., economists say: The U.S. generally spends more than it produces, while Chinese consumers and businesses produce and save more than they consume — creating the trade gap.

But Mr. Sohn pointed out that China is helping U.S. consumers and the economy by reinvesting much of its trade earnings in U.S. government debt, holding down U.S. interest rates and helping the economy recover.

While change has been painfully slow, Yukon Huang, senior associate at the Carnegie Endowment for International Peace, said the heated debate over currency issues has overshadowed other important steps China is taking to gradually correct its huge trade imbalance with the U.S.

Those steps include rising wages and broadening income gains throughout China, which hit at the core of China’s cheap labor advantage and allow Chinese consumers to increase spending on imports from the U.S. and other countries. That eventually will put a lid on the trade gap.

“The excessive focus on China’s exchange rate is not helpful in moving China’s policies in the right direction,” Mr. Huang said. “Other factors matter more.”