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U.S. Treasury Issues Strong Warning to China on Currency

RENEE MONTAGNE, host:

Treasury Secretary John Snow yesterday called on the Chinese government to revalue its currency. Many argue the yuan is kept artificially low, and that hurts US manufacturers. Those manufacturers and some members of Congress felt the Treasury secretary did not go far enough. NPR's Adam Davidson reports.

ADAM DAVIDSON reporting:

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For two years, the US has pressured China to raise its currency's value against the dollar, but that pressure has been applied quietly behind closed doors. Yesterday, in a press conference, Secretary Snow made things public.

Secretary JOHN SNOW (Treasury Department): We make the point that it's in China's best interest to reform its system and to do so immediately.

DAVIDSON: For more than a decade, China has kept its yuan stuck at the same fixed exchange rate, 8.28 yuan to the dollar. Many economists say that's undervalued by as much as 40 percent. The Chinese keep their currency low so their exports will be cheaper. The cheap yuan means China can sell clothes, car parts, DVD players for artificially discounted prices. US manufacturers say they can't compete. And Tim Ryan, a Democratic congressman from Ohio, says Snow should have realized that.

Representative TIM RYAN (Democrat, Ohio): The report was a cruel joke on the US manufacturing base.

DAVIDSON: He says he and many members of Congress--Democrat and Republican--have heard constituents call for stronger action against China. He says factories are closing and workers are losing their jobs.

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Rep. RYAN: I think the Congress is going to get a good feel from their constituents, their small manufacturers, their workers and labor communities. They're physically going to say that this isn't solving the problem, and I think there's going to be a backlash in Congress.

DAVIDSON: The backlash began immediately after Snow's remarks. Senator Charles Schumer, a New York Democrat, and Lindsey Graham, a South Carolina Republican, held a press conference to condemn Snow's report. Schumer said Snow gently encouraged China to change its currency's value. Instead, Snow should have said they are guilty of deliberately and unfairly altering the yuan's exchange rate.

Senator CHARLES SCHUMER (Democrat, New York): If it quacks like a duck and walks like a duck and swims like a duck, it's a duck. They are manipulating their currency, and for the report not to find that is sort of strange.

DAVIDSON: Schumer and Graham have a bill that calls for an across-the-board tariff on all Chinese goods until the country revalues the yuan. Congressman Ryan has a bill before the House calling for the US government to take legal action against China through the World Trade Organization. Secretary Snow says those moves are troubling.

Sec. SNOW: That's something we need to avoid. That's clearly the wrong course.

DAVIDSON: Snow said Congress is contemplating what he calls protectionist policies that will lead to economic isolation. That, he says, will hurt both China and the US. Nouriel Rodini, a professor at NYU and former Treasury Department adviser, said the economic relationship between China and the US is complex. If China revalues its currency before the US lowers its own budget deficit, there will be a steep rise in US interest rates. That will slow down the US economy.

Professor NOURIEL RODINI (NYU): And that slowdown in demand could lead to a very sharp slowdown in US economic growth, what we refer as a hard landing. We could have a US recession, followed by global recession

DAVIDSON: China's minister of Commerce, Bo Xilai, said Snow's report is not reasonable. Treasury Department officials said that if China doesn't act, their next report on foreign currencies, due in the fall, will use even stronger language. Adam Davidson, NPR News.

MONTAGNE: This is NPR News. Transcript provided by NPR, Copyright NPR.