January 23, 2009

China is manipulating its currency

POLITICS - Treasury Secretary-designate Timothy Geithner says U.S. President Barack Obama believes China is "manipulating" its currency, a declaration that American manufacturers have long sought in their efforts to combat America's soaring trade deficit with China.

"President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency," Geithner wrote in answer to questions submitted to him by members of the Senate Finance Committee. "President Obama has pledged as president to use aggressively all the diplomatic avenues open to him to seek change in China's currency."

He noted that while in the Senate, Obama sponsored legislation along with other senators that would overhaul the process for determining what countries are manipulating their currency to gain trade advantages in competition with the United States. That legislation would have authorized a new enforcement process "so countries like China cannot continue to get a free pass for undermining fair trade principles."

This raises the possibility that the Obama administration will take a tougher line with China than former President George W. Bush did. The previous administration refused to cite China as a currency manipulator in a report that Congress requires the Treasury Department to prepare twice a year.

Instead, former Treasury Secretary Henry Paulson insisted that the best way to get China to revalue its currency was through diplomatic engagement. The Bush Administration began the Strategic Economic Dialogue, high-level discussions that have been held twice a year starting in late 2006.

During this process, China did allow the value of its currency to rise by 21%, but economists estimate the Chinese Yuan is actually worth two to three times the current amount, giving them an unfair advantage. American manufacturers also say that the Chinese yuan is significantly undervalued, making Chinese goods cheaper for U.S. consumers and American products too expensive in China.

While Geithner did state that Obama believes China is manipulating its currency, he said the new administration would consider a number of factors in deciding how to proceed. "The question is how and when to broach the subject in order to do more good than harm," Geithner wrote.

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