Currency dispute strains U.S.-China trade talks

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U.S. and Chinese officials have been traveling to each other's capitals in recent months trying to tee up other issues more likely to produce agreement. But the leader of the U.S. delegation, Treasury Secretary Henry Paulson, has said Chinese action on the yuan — rather than market opening, anti-piracy or other areas — is the benchmark by which he would measure Beijing's progress.

Critics have charged that Beijing keeps the yuan undervalued, some say by as much as 40 percent, to make its exports cheaper, creating an unfair price advantage that fuels its trade surplus.

Under pressure, Beijing broke a direct link between the yuan and the dollar in July 2005 and revalued the currency by 2.1 percent. Since then, it has allowed the currency to rise 5.3 percent against the dollar in tightly controlled trading. Economists expect an increase of 4 percent to 7 percent over the course of 2007 under the current system.

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Washington is pushing for faster action, saying that the undervalued yuan is contributing to a loss of U.S. manufacturing jobs. U.S. legislators have introduced a bill that would enable companies to seek tariffs on Chinese goods in retaliation for its currency policies, though a similar measure in 2005 failed.

Sens. Charles Schumer, D-N.Y., Lindsey Graham, R-S.C., Max Baucus, D-Mont., and Charles Grassley, R-Iowa, say they are working on a China currency bill and plan to introduce it in June.

Wu, the trade envoy, rejected such sentiments as irresponsible.

"Such irresponsible acts can only obstruct economic globalization and hinder the fundamental interests of both China and the U.S., our peoples and the sustainable and steady growth of the world economy," she wrote.

A rise of 10 percent in the yuan could lead to the loss of 5.5 million jobs in China, according to a report by the Chinese central bank. It said companies hardest hit would be those that make textiles, furniture, shoes and toys for export.

"If the yuan rises by another 5 percent, our profits will be totally wiped out," said Li Shaoxiong, deputy general manager of the Fujian Ala Shoe Co., which sold half its 2006 output of 6 million pairs of athletic shoes to American retailers.

Beijing is counting on such labor-intensive light manufacturers to create millions of new jobs. Even though its bustling economy is expected to grow by more than 10 percent this year, a big share of that is in heavier manufacturing and other industries that create fewer jobs.

"Overall, this is a political thing. Will some companies suddenly have to close down, and will this cause opposition and political repercussions?" said Yiping Huang, an economist with Citigroup Inc.

Chinese officials have ruled out any sharp revaluations in response to U.S. pressure, insisting at a briefing this week on the Washington trip that such a step might disrupt the economy.

"Companies are all complaining about the yuan appreciation. Both sides are under pressure. We need a balance," said a Finance Ministry official, who spoke on condition he was not identified by name.

Officials at the briefing told reporters that they were frustrated in dealing with a Congress whose members turn local factory closings into international trade disputes.

There is a "massive misunderstanding" between Beijing and Washington that has left China believing "political theater" that produces no firm agreements next week will defuse tensions, Kindopp said.

"I think that Wu Yi and her team have not been fully briefed from her own underlings on the rising political pressures," he said, "and some of this stuff has taken them by surprise."

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