Senators Warn China on Undervalued Currency

Published March 23, 2006

| FoxNews.com

The Chinese trade surplus with the United States has ballooned to more than $200 billion, partly because Chinese goods are made more cheaply and partly because China's currency policy keeps its goods cheaper.

On Thursday, Sen. Charles Schumer, D-N.Y., speaking to reporters from China, said he is optimistic the Chinese are coming around to making adjustments to its currency system.

Click into the video tab near the top of the story to watch a report by FOX News' Jim Angle

"I think the Chinese have come to realize that their previous policy ... needs to change," Schumer said in a conference call from Beijing.

Schumer said the artificially pegged currency system is beginning to hurt the Chinese, who have an unstable amount of reserves of American bonds and debt. The Chinese save at a 40 percent savings rate, Schumer added, compared to a negative savings rate by Americans, but that has not really benefited the Chinese people. Consumers outside China's coastal areas have not been able to improve their lifestyles significantly.

"They save a huge amount but don't spend on any goods," Schumer said. "It makes sense from the world economic point of view ... that the Chinese consume more goods internally, take in more exports from the United States, and it makes sense for the United States to invest and save more.

"The surprise to us is the Chinese realize this. We don't think this is lip service," he said.

On Wednesday, Schumer and Republican Sens. Lindsey Graham of South Carolina and Tom Coburn of Oklahoma warned Chinese officials that if they don't change that policy very soon, Congress will take action against them in the coming weeks.

Schumer and Graham are sponsoring legislation that would impose 27.5 percent tariffs on all Chinese goods coming into the United States if China does not agree to stop keeping its currency artificially low against the dollar, which gives it an unfair edge.

"I believe the currency issue is one of the defining moments in terms of our relations with the Chinese," Graham said.

Experts say the undervalued currency gives China a huge advantage well beyond its legions of cheap labor, a situation that makes it difficult for the United States and others to compete more effectively.

Peter Brookes, a fellow in the Asian Studies Center at the conservative Heritage Foundation, said many in the United States think China's currency, the yuan, is undervalued by as much as 40 percent.

"What this does is it makes Chinese goods cheaper in comparison to other goods, especially American goods, in the United States here or overseas where Americans, in some cases, are competing with Chinese goods. So that's the real issue here," Brookes said.

The Bush administration has been pushing China on this for some time, though critics complain they have not used hardball tactics. Last summer, the Beijing government agreed to let its currency rise by about 2 percent, but President Bush said in a visit to Beijing last November that the gesture was insufficient.

"We've seen some movement, but not much, in the currency valuation. And I explained to them as clearly as I could that the value of the Chinese currency is very important for manufacturers and farmers and workers in the United States," Bush said.

Next week, Commerce Secretary Carlos Gutierrez will go to Beijing to repeat that the Bush administration is looking for concrete actions to lower trade tensions.

"This is a time for results," he told The Associated Press. "We will be very candid about our expectations and about where we believe that action needs to take place in order for China to achieve that role as a responsible stakeholder" in the global economy.

Talks are scheduled for April 11 in Washington, D.C., of the U.S.-China Joint Commission on Commerce and Trade. Following that, Chinese President Hu Jintao will meet with Bush at the White House on April 20, his first official visit to the United States since becoming president in 2003. Bush will once again press Hu to let the currency float.

"We told them that we would prefer not to enact our legislation but let the Chinese leadership come to an agreement with our government, and there is a very auspicious time for this," Schumer said.

After Hu's visit, Treasury Secretary John Snow will have to issue a report by April 30 on whether China is manipulating its currency. If the policy doesn't change by then, Beijing could be taken before the World Trade Organization or the International Monetary Fund, whose rules prohibit artificially pegging currencies.

"I think the Chinese are moving in our direction, but the next month or so will tell. They have said they are going to move in our direction, but we'll have to see," Schumer said.

The administration opposes the Graham-Schumer tariff bill, but some congressional pressure on China might make an impression, Brookes said.

"This can be very, very helpful," he said. "Actually, sometimes the threat of legislation is as good as passing the bill itself."

Schumer said that he and Graham had been planning on getting a vote on their legislation by March 31, but could delay if they get some kind of affirmation during their trip that China will float its currency. He said the yuan has moved about 1 percent over the last few weeks, and it could break through the eight yuan to $1 barrier in the coming weeks.

The senators said Wednesday that they may get enough support to override a veto if necessary — a warning that in an election year, Congress has a mind of its own.

As to the strength of their argument, Schumer and Graham also reminded Chinese officials of the recent explosion in Congress over the Dubai Ports World deal that ended up crashing and burning for the UAE-owned company, which had hoped a $6.8 billion purchase of a London-based company would give them access to terminals in the six U.S. ports.

That example, they say, shows the Chinese just what happens when Congress gets riled up.

Click into the video tab near the top of the story to watch a report by FOX News' Jim Angle.

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