Currency kowtow

December 02, 2005

The English word kowtow derives from the Chinese characters for "knock" and "head." In old China, it referred to kneeling and touching the forehead to the ground to show respect or servitude - as one before an emperor. With President Bush just back from a notably unsuccessful visit to China, his administration this week added self-insult to injury with a deep kowtow to Beijing: a Treasury report that failed to brand China a currency manipulator.

China, of course, manipulates its currency. Beijing keeps the yuan at 20 percent to 40 percent below its would-be market value by spending much of its $200-billion-a-year trade surplus with the United States on Treasury bonds and other U.S. securities that it adds to its more than $700 billion pile of foreign reserves.

These Chinese loans suppress interest rates here, helping Americans to keep purchasing Chinese exports. Those goods, in turn, are kept inordinately cheap by Beijing's currency restraints - unfairly competing with U.S. products and ultimately costing U.S. jobs. It's an unsustainable cycle, with significant negatives for the U.S. economy, that the Bush administration must get serious about unwinding. And ducking the truth about Beijing's currency control isn't part of the solution.

Labeling Beijing a currency manipulator would have at least prompted bilateral talks, if not possibly involvement of the International Monetary Fund or the World Trade Organization. Instead, the administration appears to have chosen to stick with quiet diplomacy - which so far has been ineffectual. Treasury Secretary John W. Snow even praised China for removing the yuan's fixed peg to the dollar last summer - even though that move has resulted in next to no change in the undervaluation of the Chinese currency against the dollar.

Now the administration is getting what it deserves - outrage from American manufacturers and from the likes of Democratic Sen. Charles E. Schumer of New York, leading another run at slapping a punitive tariff of 27.5 percent on all Chinese goods if Beijing doesn't revalue the yuan.

We understand that contending with China's mercantilism isn't simple. For starters, Beijing has few domestic incentives to float its currency. And attempting to dictate to China from Washington would certainly fail. But kowtowing to Beijing - by denying its currency manipulation - seems also destined to flop and to set the stage for unilateral trade sanctions by Congress that might unleash a counterproductive trade war.

China is America's most important trade relationship. It's time for this White House to figure out a policy that's neither belligerent nor bowing. An effective middle ground would be to publicly hold China accountable for movement over time toward certain currency or trade benchmarks. That at least would be more coherent than seesawing between threats and pleas.

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