China Did Not Violate Trade Law, U.S. Says

The Bush administration said Thursday that China was not manipulating its currency to gain an unfair trade advantage, a finding that angered Republican and Democratic lawmakers whose states have been hard hit by job losses they blame on cheap foreign goods.

“The Chinese are cheating,” Sen. Jim Bunning (R-Ky.) lectured Treasury Secretary John W. Snow at a Senate Banking Committee hearing.

Bunning and others were responding to the release of an eagerly awaited Treasury Department report to Congress on the policies of major trading partners in managing their currencies.

The report is issued annually and normally gets little attention. But China’s decade-old policy of pegging its currency, the yuan, to the U.S. dollar has come under fire this year because of a sharp acceleration in losses of American manufacturing jobs, much of it said to be caused by competition from China.

Although faulting China’s currency policies, the report found no violations of trade laws.

“While a number of countries continue to use pegged exchange rates and/or intervene in foreign exchange markets, a peg or intervention does not in and of itself satisfy the statutory test” to be classified as manipulation under the law, the report said.

It also said Beijing’s intervention in the currency market was “not appropriate for a major economy like China and should be changed.” The report said the Bush administration was working to push China toward a more flexible exchange policy.

Bunning, a former baseball star, told Snow the U.S. strategy on China should be tougher -- the equivalent of “a high inside fastball,” a pitch designed to intimidate batters.

Snow, testifying on the Treasury report, sought to assure lawmakers that the administration was making progress in encouraging Beijing to move “as fast as possible” to end government intervention in the currency market.

“We’re engaging the Chinese in a very direct and forceful way,” he said. “We’re not happy with the way the Chinese deal with their currency. We are committed to changing it. We’re engaged in changing it, and I think we’re making real progress.”

Many Democratic and Republican lawmakers, prodded by the textile industry and others, blame an undervalued yuan for depressing the prices of Chinese exports and hurting the competitiveness of U.S. goods abroad.

Bipartisan legislation has been introduced in Congress that would slap tariffs on Chinese imports if further negotiations with the Chinese failed.

Thursday’s report had little effect on financial markets, where it was not a surprise.

“They have couched the report in language they have used before, that they have raised issues with Japan and China but they are not accusing them,” said Larry Brickman, a currency strategist with Banc of America Securities in New York.

Snow told lawmakers that Bush had met recently with Chinese President Hu Jintao to urge China to consider ending government intervention in the currency market. Snow also recently traveled to China to promote flexibility in exchange rates, and Commerce Secretary Don Evans is there this week.

China has indicated that it would move to a flexible exchange rate, according to the Treasury report. But it noted that the Beijing government also has stated that doing so immediately would harm China’s banking system and overall economy.

Sen. Paul S. Sarbanes of Maryland, the panel’s top Democrat, questioned whether the administration was serious about ensuring that China played by the rules, given that the administration failed “to make the elementary determination, for which I believe there’s compelling evidence,” that China had manipulated its currency.

Such a declaration would mandate formal negotiations. But Snow said he was engaged in “financial diplomacy,” calling it the best strategy at this point for bringing about change in China’s monetary policy.

“The time for diplomatic niceties is past,” said Sen. Charles E. Schumer (D-N.Y.), who called the report “a whitewash” and urged the administration to take a “firm line with the Chinese.”

The administration was cheered by Thursday’s report of a 7.2% surge in economic growth in the July-to-September quarter.

But Sen. Elizabeth Hanford Dole (R-N.C.), whose home state has been hit hard by job losses, said the tariffs legislation may be “the only way to get the attention of Chinese leaders.”

Reuters was used in compiling this report.