WSJ : US Opposition to China Textiles Could Endanger Plans for Yuan

News Analysis By DAVID WESSEL [David Wessel, who has covered domestic and international economic policy for 20 years, is deputy Washington bureau of The Wall Street Journal and writes the weekly Capital column.]

THE WALL STREET JOURNAL May 20, 2005

The Bush administration's tough talk toward China could backfire.

This week or next, the White House will "request consultations" with China over surging imports of certain Chinese clothing and yarn, a step that will allow the U.S. to put a cap the increase.

That'll please those members of Congress who are pushing for measures to protect U.S. manufacturers overwhelmed by Chinese imports. But it may lead China to dig in its heels on what the administration really wants and thinks the global economy sorely needs: a long-promised move by China to let its currency, the yuan, rise against the dollar.

As politicians are well aware, Americans now see China as a huge economic threat, Republicans even more than Democrats. A new Wall Street Journal/NBC News poll finds that 55% of Democrats and 68% of Republicans deem China an "economic competitor."

All this recalls U.S. trade tiffs with Tokyo. In the 1980s and early 1990s, the U.S. complained about imports from Japan, threatened quotas or other trade barriers, sought a stronger Japanese yen and lectured Japan on how best to strengthen its economy (and its appetite for U.S. goods).

Japan reacted differently than China has: It agreed to significant "voluntary" restraints on exports of auto and steel to the U.S. It put money into factories in the U.S. and U.S. marketing of Japanese brand names. Its leaders often welcomed gaiatsu, or foreign pressure, to help its procrastination-prone system make necessary but unpopular changes.

China is different -- and so are the times.

Despite pointed Chinese complaints about the lack of America's adherence to the free-trade principles it espouses, the U.S. is within its rights under the World Trade Organization rules to limit the surge of imported apparel from China, trade lawyers say. And, though China is imposing new fees on some of its exports in response to U.S. and European yelping, a 1980s-style "voluntary restraint agreement" actually would be illegal under WTO rules.

Chinese economic technocrats are sympathetic to lectures from the U.S. Treasury: China would be better off relying less on exports and more on satisfying its own consumers. Prospects for stable growth, both in China and around the world, would improve if China let its currency rise; flexible exchange rates have proven to be good shock absorbers. China is tinkering with rules to get ready for the day when markets have more say, and bureaucrats less, over the exchange rate and interest rates.

A modest increase in the yuan's value wouldn't put a big dent in Chinese exports but would allow the Bush administration to reassure Congress that China is doing something to blunt its trade advantage.

The decision on when and how to let the yuan rise won't be made by techocrats conversant in the language of markets. It will be made by Chinese political leaders, many of whom recall the woes that flexible exchange rates caused other Asian economies in the late 1990s.

Besides, Chinese leaders don't welcome gaiatsu the way the Japanese did. China sees itself "as making a major effort to establish an environment in which currency won't be de-stabilizing, and it sees that Washington is too busy taking (what China perceives to be) cheap shots to acknowledge these efforts," says the G7 Group advisory firm. "For China, it's not only about saving face, but about 'caving in' to outside pressure, in particular to the U.S. A cave-in would erode the domestic political capital of the current Chinese administration."

In contrast to Japan, China does change. The question is whether it'll change something -- anything -- visibly enough and soon enough to allow the Bush administration to claim victory and deflect protectionist pressure from Capitol Hill.

Write to David Wessel at david.wessel@wsj.com