NYT Editorial : The Yuan Diversion

Published: May 21, 2005

The get-tough-on-China talk got tougher this week when Treasury Secretary John Snow announced that China risks being branded a currency manipulator - and thus subject to sanctions - unless it acts soon to increase the fixed exchange rate between its currency, the yuan, and the United States dollar. Mr. Snow was echoing American manufacturers and some members of Congress who complain that China is undervaluing the yuan to artificially depress its export prices. But his aim is only partly to prod China. By demanding action, he is also trying to defuse growing anti-Chinese sentiment, as evidenced by the Senate's threat last month to slap punitive tariffs on Chinese goods unless the yuan is revalued.

Given America's difficult trade issues with China - patent and copyright violations, barriers to American goods and services - why are Congress and the administration fixating on the yuan?

The Chinese currency is undervalued and that situation must be remedied, both in order for China to gain more control over its own economy and to improve international trade relations. But even a sharp upward revaluation wouldn't do much to reduce the United States' immense trade imbalances because China accounts for just a fraction of America's overall trade, and American consumers are unlikely to shun Chinese products even if their prices rise.

One reason for the fuss is that it's easier to exploit the yuan than to remedy the loss of American manufacturing jobs. For years, the United States has pursued global trade without adopting programs to fix its negative side effects, chief among them the lost jobs in generally low-skilled industries, like textiles. Nor are there policies to prepare displaced workers for better employment, like tax credits for companies to provide more training.

Focusing on the yuan also deflects the blame for America's role in promoting global imbalances.

Mr. Snow has acknowledged that the United States' federal budget deficit distorts global trade and investment. But, incredibly, he has also said that the United States is "aggressively tackling" its deficit with "appropriate fiscal policy." That statement might be valid if President Bush and his Congressional allies gave up their drive to extend Mr. Bush's first-term tax cuts permanently or if Mr. Bush abandoned his plan to borrow trillions of dollars to privatize Social Security. But there are no such reversals in sight. Contrary to Mr. Snow's assertion, then, the United States is not "doing its part" to address global imbalances.

Washington relies greatly on China for the funds to finance its deficits. Rather than positioning ourselves as China's adversary, it would be wise to cooperate, starting with honest discussion.