Snow says China isn't manipulating its currency

Trying to avoid trade war, secretary takes softer line


Seeking to avoid the onset of what could turn into a trade war with China, Treasury Secretary John W. Snow told senators yesterday that Beijing is not manipulating its currency exchange rate to gain an unfair advantage over American manufacturers.

But Snow immediately acknowledged that China did not meet the technical requirements established under Omnibus Trade and Competitiveness Act of 1988.

Under the terms of the act, if the Treasury Department finds a country has been unfairly manipulating its currency, the administration must begin negotiations with the offending country to correct the problem. If those discussions fail, the United States could take retaliatory trade action.

Snow also made his strongest statement in support of the dollar in his opening remarks before the Senate banking committee. "A strong dollar is in the U.S. national interest," he said.

His statement was a message to the foreign-exchange market that it had misinterpreted the meaning of a statement issued last month by the finance ministers of the Group of Seven leading industrialized countries at a meeting in Dubai, United Arab Emirates.

Currency traders had interpreted that statement as consistent with Snow's suggestions this year that the Bush administration would not be displeased to see the value of the dollar decline as a way of increasing American exports and reducing its enormous trade deficit.

"Snow posted a much stronger defense of the strong dollar than many expected," said Jeremy Fant, senior proprietary trader at WestLB, a German bank.

A government report yesterday showed that the American economy expanded at an annual rate of 7.2 percent in the third quarter, the biggest quarterly increase in almost two decades.

Nevertheless, after the economic report and Snow's remarks, the dollar posted mixed results in foreign exchange trading, edging up against Japanese yen but slipping slightly against the euro.

China has come under increasing scrutiny and criticism because for the past decade it has chosen to peg its currency, the yuan, at about 8.28 to the American dollar. At that rate, many analysts estimate, the yuan may be undervalued 15 percent to 40 percent against the dollar.

Even though many American companies have established operations in China and export goods back into the United States from there, manufacturers and lawmakers in the United States argue a pegged currency gives China an unfair trade advantage, costing millions of American jobs.

Through the first eight months of this year, China posted an $88.3 billion trade surplus with the United States. Commerce Secretary Donald L. Evans predicted this week that the surplus could reach $130 billion for the year, up sharply from the $103 billion surplus last year.

In his testimony yesterday, Snow pointed out that as China's bilateral surplus with the United States has mushroomed, its global current account surplus has been declining. For the first eight months of this year, China's global current account surplus, which measures trade in goods and services, was $9 billion.

Snow's conciliatory remarks are almost certain to be met with a hostile reaction by some senators. Sen. Richard J. Durbin, an Illinois Democrat, and five colleagues are sponsoring a bill that would levy a 27.5 percent tariff on imports from China unless it adjusted its exchange rate.

Based on the $103 billion trade deficit the United States ran with China last year, such a tariff, if implemented, would be the equivalent of a $28 billion tax on Chinese imports.

Snow urged the Chinese to make adjustments. "Given China's strong growth and substantial foreign-exchange reserves, following a series of economic reforms, China now has the opportunity to show leadership on the important global issue of exchange rate flexibility," he said.

China, which could take retaliatory steps that would hurt the United States, has responded to American criticism by increasing its purchases of goods from American companies that have invested heavily in China.

Potential Chinese retaliatory measures include imposing sanctions against American imports, revoking licenses issued to American companies to operate in the Chinese market and stopping the purchase or selling off some of its vast holdings of U.S. Treasury securities.

China is the second-biggest buyer of Treasury securities, after Japan. A decision to unload at least some of its holdings probably would put upward pressure on American interest rates, jeopardizing the sustainability of what now appears to be an accelerating economic recovery.

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