Imposing punitive trade sanctions against China might slow the drive to persuade Beijing to adopt a more flexible currency and will not protect U.S. jobs, Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow warned Thursday.
Clearly worried that spiraling U.S. deficits were driving Congress toward trade action, Greenspan and Snow sought to tamp down the angry mood by pointing out the possible consequences for the United States.
Both said China should loosen the peg it maintains for its yuan currency against the dollar, in its own interest and that of the global economy, but said it would be futile to try to force Beijing to do so through trade sanctions.
“A policy to dismantle the global trading system, in a misguided effort to protect jobs from competition, would redound to the eventual detriment of all U.S. job-seekers, as well as millions of American consumers,” Greenspan said.
Snow has led the Bush administration’s drive to get China to ease the peg at which it has held its yuan — at about 8.28 to the U.S. dollar — for nearly a decade. He said financial diplomacy was working and that China could and should adopt a more flexible currency, which would have the effect of making its products more expensive for U.S. consumers.
But trade action is not the way to go, he said.
“Action on any of the punitive legislative proposals before Congress now would be counterproductive to our efforts at this time,” Snow said.
The hearing, to discuss the broad topic of U.S.-China economic relations, occurred against a backdrop of more vigorous Chinese efforts to channel its booming economic wealth into takeover activity.
Chinese state-run oil firm CNOOC Ltd. has made an $18.5 billion cash offer for U.S. producer Unocal, pitting it against Chevron Corp., which also wants to acquire Unocal.
Reviewing oil deal
In response to question, Snow said that if the Chinese deal proceeds, it likely would be voluntarily submitted for review by the interagency Committee for Foreign Investment in the U.S. to assess whether it affected national security.
There are a series of proposals in Congress for across-the-board tariffs against Chinese imports, spurred by U.S. manufacturing interests that say China’s currency peg means its imports are undervalued by as much as 40 percent and that tens of thousands of U.S. jobs have been lost as a result.
Greenspan played down the idea that a higher-valued yuan would boost U.S. manufacturing activity and jobs, saying: “I am aware of no credible evidence that supports such a conclusion.”
Greenspan said a more flexible currency “would be helpful to China’s economic stability” and hence to that of the global economy, given its rising importance as a world trading power.
“The sooner the Chinese, in their own self-interest, move to a more flexible currency regime, perhaps leading other Asian currencies to become more flexible as well, the better for all participants in the global trading system,” Greenspan said.
He said China should adopt a flexible currency to defuse inflationary pressures that stem from managing the currency peg. China has built up huge reserves of foreign currency in that process, which it must “sterilize” through the issue if yuan-denominated debt, making its economy more liable to potential inflationary price rises.
“That, so far as I can see, is something that as they observe the problem emerging and as they watch the underlying inflationary forces expand, will induce them, sooner rather than later, to move their exchange rate to a more sustainable level,” Greenspan predicted.
