This is a partial transcript of "Special Report With Brit Hume," June 24, 2005, that has been edited for clarity.
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(BEGIN VIDEO CLIP)
SEN. LINDSEY GRAHAM (R), SOUTH CAROLINA: China doesn't go away, never will. Don't expect it to. Don't want to build a wall around my country. But I do believe the Senate has an opportunity working with the administration to get movement across the board that would be good for better relations between the United States and China.
(END VIDEO CLIP)
JIM ANGLE, GUEST HOST: One nation — that's Senator Lindsey from testimony this week — one nation that is getting more and more attention in Congress, and not the kind of attention it wants, is China (search), which is flooding the U.S. and other nations with inexpensive products, also driving up the world price of oil, and now trying to buy an American oil company.
Is it an enemy or just a competitor? And why are lawmakers on Capitol Hill so worked up about it? Good questions for Ken Rogoff, professor of economics at Harvard University who just testified on Capitol Hill on these very issues.
And members of Congress are in a lather over China these days.
KENNETH ROGOFF, HARVARD UNIVERSITY: There's no question they're upset about it. We're running a huge trade deficit bilaterally against China, over $160 billion, and they want to know what's going on.
ANGLE: Now, China's economy has been growing at rapid rates, far more rapid than most other economies in the world, for years now. It's only in the last two or three years that people have really started to get worked up about this Washington. Why now?
ROGOFF: It's just growing so fast. It's starting to play a bigger and bigger role in markets. It's driving oil prices. It's drive commodity prices. It plays a role in the world trading system. I mean, it's just getting so big, it's hard not to notice it.
ANGLE: Now, their goods would be cheap in any case because labor is cheaper there, but they also have pegged their currency — we don't want to get into too much detail — but they've pegged their currency to the dollar. Most people means that it is, therefore, undervalued and that makes their goods even cheaper than they might otherwise be and makes U.S. goods that might go to China even more expensive.
ROGOFF: Well, a lot of the congressmen are very concerned about that. They've been fixing their currency against ours instead of letting go up, which in the natural course of things it would. And I think it would be advisable if they did. And a lot — if they would let it move a little, that might release some of the heat here.
ANGLE: Because the pressure is building. And you had in Congress this week and in past weeks people talking about imposing 27.5 percent tariffs on some Chinese goods.
ROGOFF: Yes, I think that's really going nuclear, so to speak, here. And that would be really unfortunate to get in a trade war. We have a hugely beneficial relationship. We like shopping at Wal-Mart, Home Depot, Best Buy, all these places that use a lot of Chinese goods. And if we get into a tariff war — it's not just tariff. But they're going to do something back to us, and it could spill over into Taiwan, North Korea. We'd like to handle this smoothly.
ANGLE: Now, all of us buy inexpensive goods from China. You can't avoid it. They are throughout the economy, and all the places you just mentioned. And they're very good, but literally by the boatload selling inexpensive goods.
It's something we're all accustomed to. It's something that we all do. Why is it that this is a bad thing for the U.S. on the one hand? Is it because the Chinese are cheating in some way? How does it hurt us?
ROGOFF: It isn't a bad thing. It's fantastic. I mean, we're buying things at a small fraction of the cost we used to. It has driven our productivity. It's driven our income growth. It has been at the core of why we have prospered so much the last 20 years.
But the problem is, it's happening so fast that's — factories are closing, it dislocates people, and it's not easy to adjust. And that's really where the pressure comes from.
ANGLE: You mean, if it slowly, as it has sometimes in decades past, it's easy for the U.S. economy to adjust, create new jobs, better jobs, for the old jobs that are lost, but when it happens this fast, that's hard to do?
ROGOFF: Yes, I mean, I don't want to blame too much of what's going on with our jobs on trade. There are a lot of other things. But I think the speed of it is just numbing. They are growing so fast. They're bringing workers in so fast that you can't help but notice it.
ANGLE: Now, one of the most surprising things this week is China is bidding on a U.S. oil company, bidding $2 billion more than a competing American bidder. Why do the Chinese want to buy an American oil company?
ROGOFF: Well, they're sitting on a lot of low-interest dollars. They have been buying our treasury bills by the boatload.
ANGLE: With all of those profits?
ROGOFF: With all of those profits. And they want to hold something else. It's natural. The Japanese did it before them, and the Europeans. It's just a natural progression of things.
ANGLE: Now, the Chinese are also using a lot of oil, because their economy's growing so fast. Somebody told me that they have put 300 million people into the middle class in the last few years. So you get a lot more energy usage, obviously.
How does owning an oil company help them? Is it just an asset, or are they doing that because it somehow helps them with their oil and energy needs?
ROGOFF: Well, I think they're just putting their toe in the water here to see how this is going to go, what the reaction is. I think, actually, a lot of the oil from this company's committed to Indonesia, and Thailand, and other countries.
But they need to diversify. They're holding $650 billion at their central bank in low-interest reserves. They want to hold something else. And that's really what's going on here.
ANGLE: Now, obviously, there is a lot of pressure building in Congress. People are standing in line to take some sort of action against China, which may or may not help the administration. One, does that help as leverage? And two, how does that complicate another factor, which is that we're constantly asking favors of the Chinese, for instance, trying to get them to press the North Koreans to negotiate away their nuclear arsenal?
ROGOFF: Well, absolutely. I mean, it's a very multifaceted, delicate relationship. What's going on in North Korea really affects us. And we need to look at all of these things at the same time.
It is understandable the frustration, that we believe in free trade — and you hear many of the congressman yesterday testifying they like free trade — but they'd it to be transparent, and they'd like to see the Chinese currency move towards making it more transparent. And it's understandable.
ANGLE: OK. Thanks very much. We appreciate it.
ROGOFF: Thank you.
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