WASHINGTON -- President Obama faces a deadline Friday that could test already fragile U.S.-China relations: He must decide whether to accuse Beijing formally of using its currency to gain unfair trade advantages against the United States.
Labeling China a currency manipulator would enrage the Chinese just as the Obama administration looks for the Beijing government's help on major global initiatives. Failing to do so, or postponing a decision, also could damage Obama's struggling Democratic Party ahead of crucial congressional elections on Nov. 2.
Obama is under pressure to punish China for trade policies that U.S. lawmakers say cost millions of U.S. manufacturing jobs. Many are angry over a politically sensitive U.S. trade deficit with China that has climbed to an all-time monthly high.
Friday's deadline is part of a congressional requirement for the Treasury Department to prepare a twice-a-year report whether any countries are manipulating their currencies.
The U.S. trade deficit with China rose 8.2 percent in August to an all-time high of $28 billion, surpassing the record $27.9 billion set in October 2008. So far this year, the U.S. deficit with China, the largest imbalance with any country, is running 20.6 percent above the 2009 pace.
American manufacturers contend that an undervalued currency gives China a trade boost by making Chinese goods cheaper in the United States and U.S. products more expensive in China.
The administration, worried about high unemployment and losing ground to opposition Republicans in the elections, wants to look tough on China. That is especially true after ministers from around the world left last week's global finance meetings in Washington without resolving how to deal with differences over currency.
At the same time, U.S. officials see Chinese cooperation as essential to American efforts to deal with the Iranian and North Korean nuclear standoffs, climate change and other difficult issues.
U.S. lawmakers, soon to face frustrated and anxious voters, appear to have tired of White House attempts to strike a delicate balance with China. The House sent the administration and China a strong message last month by passing legislation that would impose economic sanctions on countries found to be manipulating their currencies.
If the United States should designate China as a currency manipulator, it would trigger negotiations between the two countries and could result in U.S. economic sanctions against Beijing.
While Friday's deadline puts the Obama administration in a diplomatic and political bind, U.S. officials have options other than an outright declaration that China manipulates its currency.
The Treasury Department could postpone the report, which Obama, following the lead of his predecessor, George W. Bush, has done before. It also could use strong words to criticize China without making a formal declaration of currency manipulation.
Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, predicted that the report "will come right to the edge of calling China a manipulator, basically saying that unless China allows market forces to work and currency to be more responsive, it will be a manipulator."
The administration, Hufbauer said, worries that if it directly slams China on currency, and Beijing still does not act, it will lead to a standoff, with cooperation frozen as both sides refuse to compromise.
U.S.-China ties hit a low point recently, with the countries clashing over territorial disputes in the South and East China seas, human rights and longtime sore points Taiwan and Tibet.
Ahead of last week's finance meetings, Treasury Secretary Timothy Geithner ratcheted up pressure on China to make more progress in moving toward flexible exchange rates.
China has allowed its currency to rise in value by about 2.3 percent since announcing in June that it would introduce a more flexible exchange rate. Chinese officials say their gradual effort to revalue their currency is the best approach to take. Allowing the currency to rise too rapidly, they say, would cost thousands of manufacturing jobs and destabilize the Chinese economy.