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Bush Administration Capitulates to China in Currency Report

Prof. Peter Morici - 5/11/2006

The Treasury Department today released its long awaited report on the International Economic and Exchange Rate practices of major U.S. trading partners. Regarding China, it concluded that “far too little progress has been made in introducing exchange flexibility” however “the Treasury Department is unable to determine, from the evidence at hand, that China’s foreign exchange system was operated during the last half of 2005 for the purpose (i.e., with the intent) of preventing adjustments in China’s balance of payments or gaining China an unfair competitive advantage in trade.”

It would seem that Secretary Snow would like China to volunteer that it is manipulating the global commercial system before it can cite it.

In 2005, China’s central bank purchased $206 billion in foreign currencies and securities—that came to about 9 percent of China’s GDP. Those purchases put into the hands of foreign consumers yuan equal to about one-third of China’s exports.

Essentially, China’s currency market intervention created a 33 percent off-budget subsidy on Chinese exports. If that is not an unfair competitive advantage in trade one must wonder what would qualify as such in the minds of U.S. Treasury officials.

While the Administration did express disappointment with the slow progress of Chinese currency market reforms, the most commendable aspect of this report is how eloquently Secretary Snow made the case for Beijing.

As per usual, the Administration warned against perils of protectionist responses toward China. Perhaps President Bush and Secretary Snow could be as vigilant regarding Chinese mercantilism.