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With Yuan And U.S. Exports Up, China Critics Are Keeping Quiet
2008-02-28
All's quiet on the yuan front, despite the U.S.-China trade gap widening to another record last year. A slowing U.S. economy, strong exports to China and creeping concerns about inflation at home have muted critics of Beijing's exchange-rate policy. "Mum's the word on China at least until recession fears subside," said Richard Yamarone, economist at Argus Research. "One of the pistons keeping the U.S. economic engine running and thwarting recession is exports. I'd be really surprised if we hear much from anybody regarding China and the value of its currency up to the election." Many politicians and U.S. companies and some economists have charged China with unfairly boosting exports by keeping its currency artificially low. But with the euro soaring above $1.52 and the U.S. importing inflation from around the world, there's not as much demand for a weaker dollar now. Yuan Picks Up Speed China has let the yuan's appreciation speed up. The yuan rose 7% vs. the dollar last year after a 3.4% gain in 2006. Many economists believe the yuan may climb 7%-10% against the dollar in 2008. It's already risen 2.7% through Feb. 28. "Things are moving in the right direction," said Jay Bryson, global economist at Wachovia. But the yuan's recent gains fall short of what critics have demanded, Bryson noted. Some economists say China's currency, largely fixed vs. the dollar, is still undervalued by as much as 30% to 40%. Other analysts dispute that. Sen. Charles Schumer, D-NY, has threatened to slap imports from China with sky-high tariffs unless it revalues its exchange rate. Legislation proposed by Schumer and Sen. Lindsey Graham, R-S.C., stalled last year. In early February, Schumer said he expects the Senate finance and banking panels to agree on a China bill soon. Trade Gap Fades As Issue But, branding the Chinese as currency manipulators "doesn't have the political traction it once did," said Bryson. "There's bigger fish to fry right now. All the legislation is related to the subprime debacle." The U.S. trade deficit with China widened to a record $256.3 billion last year, up 10.2% from 2006. In December, the trade gap with China fell 0.6% vs. a year earlier, the biggest drop in nearly 6 years. Exports to China soared 32% to a record $6.9 billion, said Todd Lee, a managing director at Global Insight. Imports were far higher at $25.7 billion, but rose just 6.6%. Helped by the weaker dollar and stronger overseas growth, the overall U.S. trade gap fell 6.2% to $711.6 billion, the first drop since 2001. "U.S. economic growth is under pressure," said John Frisbie, president of the U.S.-China Business Council. "There's a realization that exports are helping to ease some of those pressures. China is our third-largest export market now and our fastest growing. They overtook Japan last year. They're now behind only Canada and Mexico." The North American Free Trade Agreement scrapped most trade barriers with Canada and Mexico. The leading Democratic presidential contenders, Barack Obama and Hillary Clinton, have been harshly critical of NAFTA, attacking each other for being too supportive of free trade in the past. If the U.S. economy slows further, there could be new calls to punish China for taking U.S. jobs. That's not a good idea, says David Wyss, Standard & Poor's chief economist. "Anybody that's going to run the country -- you don't want to get there by China-bashing," he said. "That might make it difficult to run the country afterward. They're a big player in the world economy. And you don't want to fight them. There's a big difference between being rivals and being enemies." Treasury Secretary Henry Paulson has tried to use diplomacy to encourage China to let the yuan rise. But neither his soft words nor lawmakers' harsh rhetoric have had much effect. Beijing is largely letting the yuan rise faster for its own self-interest, economists say. It wants to curb inflation and cool its red-hot growth. China's consumer prices rose 7.1% in January vs. a year ago, an 11-year high. Producer prices rose 6.1%. As the yuan climbs, the U.S. is exchanging rising trade deficits for rising inflation. January prices of imported Chinese goods shot up 0.8% vs. December and 3.3% vs. a year earlier -- both record highs. Back in January 2007, Chinese import prices fell 0.9%. A stronger yuan will only exacerbate those trends, and policymakers know it. China trade critics will likely resurface, however, says Albert Keidel, senior associate at the Carnegie Endowment for International Peace. "My working hypothesis is that cooler heads realize that, in a potentially volatile political year, it is not a good idea to stir up something that could get out of hand and do a lot of harm to U.S. interests across the board," he said. "But, I'm not sure this will last once the general election is under way next fall, when Democrats (may) accuse the Republican administration of not getting enough out of China."
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