CORRECTED: U.S. currency push on China no slam dunk

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Wed Mar 31, 2010 10:51pm

By Paul Eckert - Analysis

WASHINGTON (Reuters) - China's currency is clearly undervalued, but pressure on Beijing to make its currency rise in value won't trim the U.S. trade deficit with China or reduce the jobless rate, say American economists.

Political pressure is building on the Obama administration to name China a "currency manipulator" in a mid-April report, and lawmakers are threatening to slap tariffs on Chinese goods to offset any export subsidy a cheap currency gives China.

However, many trade economists and businessmen say that at best, a heavy-handed U.S. approach on currency will fail. At worst, it could backfire, sparking a U.S.-China trade war.

Instead, Washington should address the currency and other factors behind global financial imbalances in a multilateral setting. Bilaterally, the Americans should focus on Chinese trade barriers that suppress sales to China and may violate World Trade Organization (WTO) commitments, they say.

"The currency is undervalued, period. It's also a structural distortion because the world's second-largest economy shouldn't be pegging to the largest economy," said Derek Scissors of the Heritage Foundation in Washington.

Economists say China's currency is pegged to the dollar at a rate that is between 15 and 40 percent lower than the level markets would set if the yuan were freely traded.

Slamming the Chinese over currency is politically appealing

in an election year in which U.S. unemployment is near 10 percent and China's trade surplus is expanding again.

JOBS AND TRADE

Economically, however, "this is a dead end," warned Scissors. "If you're looking to create jobs, the currency change won't do it."

"The Chinese have reserved large parts of their market for the state -- by rules, by subsidies, by everything you can imagine -- and that's the big cap on U.S. exports, not the currency," he said.

The U.S. Trade Representative's office on Wednesday issued an annual report that cited a range of Chinese regulations, subsidies and policies that favor state firms over foreign firms and contravene China's WTO obligations.

Earlier this month, the left-leaning Economic Policy Institute issued a study that said China's "currency manipulation" and other trade policies caused the loss of as many as 2.4 million U.S. jobs between 2001 and 2008.

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http://www.reuters.com/article/idUSTRE62U5P320100401