Source: DTN News / By Kathy Chen & Jason Dean WSJ
(NSI News Source Info) TORONTO, Canada - February 18, 2010: The mounting political tension between U.S. and China is poised to take on a more pronounced economic component—with Washington, in coming months, expected to press China over what officials see as an undervalued yuan.
This week, China is facing o
ff with the U.S. over President Barack Obama's planned meeting Thursday with the Dalai Lama, who Beijing alleges has pushed for Tibetan independence from China. On Wednesday, the U.S. State Department said Secretary of State Hillary Clinton would also meet Thursday with the exiled Tibetan spiritual leader.
Those tensions come on top of January's announcement that the U.S. would sell $6.4 billion worth of arms to Taiwan, which Beijing claims as part of its territory, and continuing sparring over a cyberattack on Google Inc. widely seen as originating in China. The two sides have also disagreed over whether to sanction Iran over its nuclear program.
But for U.S. officials, China's exchange rate is emerging as a top concern. President Obama and other administration officials argue that the Chinese currency is undervalued. That makes Chinese exports artificially cheap in terms of other foreign currencies, contributing to the U.S.'s large trade deficit with China and, they say, depriving Americans of jobs.
Also on the economic front, U.S. officials have taken notice of increasing, vocal concerns among U.S. multinationals over what these companies view as growing protectionist trends in China. For years, these companies have acted as a ballast for stable bilateral ties.
"We expect to see actions by China" to help rebalance global trade flows, a White House official said. If Beijing fails to act, that "will put greater and greater pressure on the U.S. to respond."
"We have 10% unemployment and China is racking up huge trade surpluses with an undervalued currency—the politics [of that] are very tough," said Kenneth Lieberthal, a former Clinton administration official who now heads Brookings Institution's John L. Thornton China Center in Washington.
Officials and analysts in both countries say economic codependence and shared strategic interests over such issues as North Korea and nuclear nonproliferation are likely to ensure that relations generally remain cooperative. Underscoring that, five U.S. warships, including the aircraft carrier USS Nimitz, docked in Hong Kong on Wednesday for a four-day rest stop. 
But lately, many elements of U.S-China cooperation have been put to the test. While the value of the yuan has long concerned U.S. politicians and business, the rhetoric is heightening as the U.S. continues to grapple with high unemployment and China hits new growth benchmarks.
In a meeting with Senate Democrats this month, Mr. Obama vowed to "get much tougher" with China on trade rules, including currency rates, to ensure that U.S. goods weren't at a competitive disadvantage. The U.S. says its trade deficit with China totaled $226.83 billion in 2009—narrower than the annual deficits from 2006 to 2008, but still the U.S.'s largest imbalance with any nation.
The administration has already acted on some trade issues. In September, U.S. Trade Representative Ron Kirk announced tariffs on certain tires made in China, in response to a surge in Chinese tire exports to the U.S. The next big test comes in April, when, under the Omnibus Trade and Competitiveness Act of 1988, the U.S. will decide whether to label Beijing a "currency manipulator."
Such a move technically wouldn't result in any U.S. actions against China. But invoking the rarely used act—no countries have been named since 1994—would likely infuriate Beijing and give Congress new ammunition to press for concrete action against China.
A senior Treasury Department official said no decision on the matter has been made.
Treasury Secretary Timothy Geithner said during his Senate confirmation hearings in early 2009 that Mr. Obama believed China was manipulating its currency. But the administration declined in its semiannual Treasury Department report that April to officially label China a manipulator.
Some U.S. lawmakers are also considering steps to address the Chinese-currency issue. Sen. Chuck Grassley, an Iowa Republican, will "evaluate legislative options" if the administration doesn't label China a manipulator, said Grassley spokeswoman Jill Kozeny.
Nicholas Lardy, a China scholar at the Petersen Institute for International Economics in Washington, argues that the yuan is currently undervalued "in the neighborhood of 25%, and perhaps as m
uch as 30%," against the currencies of its trade partners.
China began letting the yuan appreciate against the dollar incrementally in July 2005, after years of keeping it effectively pegged to the greenback. The yuan gained about 21% against the dollar from July 2005 to July 2008, when Beijing halted the rise, as the global economic crisis sapped demand for its exports and fueled worry about a domestic economic slowdown.
Many analysts think Beijing might be willing to partially unshackle the yuan again because of concerns that its stimulus-fueled economy risks overheating, making inflation a concern. A stronger Chinese currency would put downward pressure on prices by lowering China's costs for imported raw materials and increasing its purchasing power for foreign goods. A stronger yuan would also likely trim exports, and thus slow the economy.
Beijing would have to weigh the advantages of preempting economic overheating with the risks of slowing the economy too much. Any currency movement would almost certainly be gradual, given a stronger yuan's potential impact on Chinese exports and jobs. Too much foreign pressure on China could prompt the country to be more intransigent on the exchange rate, which Beijing views as a domestic issue.
"I don't think China is likely to revalue the yuan before April, regardless of whether the U.S. labels China a currency manipulator," says Ji Zhu, an economics professor at the Beijing Technology and Business University. "It won't be forced to make decisions simply based on some pressure from the U.S."
He said China's priority remains ensuring stability. "It needs to maintain a trade surplus and continued export growth, to promote job creation."
U.S. multinationals, meanwhile, have been complaining to the Obama administration about proposed rules issued by Beijing late last year that would set a list of preferred suppliers for the multibillion-dollar government procurement market and give preferred treatment to companies whose products are deemed to include adequate levels of local innovation. U.S. and other foreign companies fear this could put them at a disadvantage to Chinese players, and compel them to shift intellectual property to China.
Nineteen U.S. trade groups, including the U.S. Chamber of Commerce and the National Association of Manufacturers, sent a letter in late January to Obama cabinet members saying the Chinese programs "threaten to exclude a wide array of U.S. firms from a market that is vital to their future growth and ability to create jobs here at home." The letter urged the officials to make the issue a "strategic priority."
In an unusually broad response, U.S. officials from several government agencies have approached the Chinese to relay concern over the proposed rules, according to people familiar with the situation. "We are expressing our serious concerns with all appropriate counterparts in the Chinese government," said Carol Guthrie, a spokeswoman for the U.S. Trade Representative's office.
Jeremie Waterman, senior director of China policy of the U.S. Chamber in Washington, said: "It's increasingly clear (the Chinese) want to limit the ability of foreign companies to compete."—Sue Feng in Beijing and Bai Lin in Shanghai contributed to this article.
Write to Kathy Chen at kathy.chen@wsj.com and Jason Dean at jason.dean@wsj.com
This article is being posted from Toronto, Canada By DTN News/Defense-Technology News dtnnews@ymail.com
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