This article appeared on page 1 of the International Herald Tribune (Kuala Lumpur edition) on 26 September 2003. Taken from here.

Economists fault Bush in pressure on Asians
By Edmund L. Andrews/NYT
Thursday, September 25, 2003

WASHINGTON: Publicly berating China and Japan over their exchange rates is winning the Bush administration praise from U.S. manufacturers, but it is not playing so well among economists.

If China let its currency rise against the dollar, as Treasury Secretary John Snow has been doing urging it to do, Chinese imports would be more expensive and U.S. exports cheaper, helping U.S. producers.

But a growing number of experts, including some with close ties to the Bush administration, warn that a higher value for the yuan could create more problems than it solves.

For one thing, China and other Asian countries have helped to finance the rapidly expanding U.S. deficit with huge purchases of Treasury securities over the past year.

They have done so largely to keep their own currencies low against the dollar, and the added demand for these securities has helped keep U.S. interest rates low.

If China and Japan were to reverse course, they would start selling the Treasury securities, and that could drive U.S. rates higher.

“This is not a small amount of money we’re talking about,” said Desmond Lachman, a resident fellow at the American Enterprise Institute, a conservative policy research organization that has close ties to the White House.

“If the Asians aren’t buying the paper, then you’ve got to ask yourself who is going to be buying this stuff.”

R. Glenn Hubbard, who was chairman of Bush’s Council of Economic Advisers until March, has been even blunter.

In a commentary published this month in The Wall Street Journal, Hubbard wrote that it was both “unpersuasive” and “unfortunate” to blame China’s currency for job losses in U.S. manufacturing.

Hubbard also warned that letting the yuan float could wreak havoc in China’s large and troubled banking sector.

And while many economists agree that China and Japan have kept their currencies artificially weak to make their own exports cheap in the United States, many also warn that an abrupt shift in policy could have disastrous consequences.

“They are not in a position to cope with it right now,” said Stephen Roach, chief economist at Morgan Stanley Dean Witter. “It would be destabilizing for China, destabilizing for the United States and destabilizing for the world.”

In a sharp departure from past policy, Snow has repeatedly and publicly called for Asian countries to adopt more “flexible” exchange rates.

China, which has a trade surplus with the United States of more than $100 billion this year, has been the biggest target of Snow’s efforts. China keeps its currency fixed at an exchange rate of about 8.3 yuan to the dollar, a rate that has remained constant since 1994.

Critics of Chinese policy say the yuan is now artificially undervalued by about 40 percent against the dollar.

The Bush administration is not alone in pressuring China. Democratic lawmakers have introduced legislation that would impose import tariffs of as much as 27 percent on Chinese products if its currency remains fixed.

Administration officials reject the idea of punitive tariffs as too heavy-handed. John Taylor, under secretary of the Treasury for international affairs, told Reuters on Wednesday that the administration preferred “financial diplomacy.”

But that may not be enough. The National Association of Manufacturers, which has campaigned for more than a year for pressure against China, said this week that it would file a legal complaint that accused China of using its currency value as an “unfair trade practice.”

Last weekend, Snow persuaded officials from the Group of 7 industrialized countries to declare their support for more “flexible” exchange rates - a clear attempt to pressure Asian governments into letting their currencies rise more freely in value.

But even people who have long made similar arguments distanced themselves on Wednesday from the United States.

Horst Koehler, managing director of the International Monetary Fund, cautioned against publicly pressing countries to change their foreign exchange policies.

“Certainly, the role of the exchange rate is nothing that we should push ahead through public trumpeting and organized pressure,” Koehler told reporters at the fund’s board meeting on Wednesday in Dubai.

It remains far from clear whether either China or Japan will change its approach and let its currency float more freely. Chinese officials have said they will not change policy soon, and Japanese officials have already warned that the markets “overreacted” when they drove the value of the yen on Monday to its highest level in three years.

Carl Weinberg, global economist at High Frequency Economics, said the Bush administration’s tactics were based more on politics than on economics.

“The president is running for re-election,” Weinberg said, “and he wants to support big business.”

  

Posted on September 26th, 2003 by jl
Filed under: Intl Currency