US panel OKs tariffs to pressure yuan

08:19, September 25, 2010      

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By Chen Rui

A US Congress committee Friday approved a bill that would allow the US Commerce Department to levy tariffs on Chinese imports as retaliation over the value of Chinese currency.

The House of Representatives Ways and Means Committee backed the legislation in a vote, a move that is likely to increase trade tensions with China.

Chinese Premier Wen Jiabao, who has just concluded a visit to the United Nations headquarters in New York, said Wednesday that any drastic appretion of the yuan simply has no grounds ,and there is no natural link between the exchange rate and a favorable balance of trade.

The yuan has appreciated nearly 2 percent since June 19, when China pledged to increase its flexibility, but many US lawmakers argue the rise was insufficient and blamed China for "depressing the yuan's value," which they say has led to job losses in the US manufacturing sector, according to Dow Jones.

Wen said the current high unemployment rate in the US was not caused by China's trade surplus, because most Chinese exports to the US are labor-intensive or low added-value products US manufacturers no longer produce.

Addressing the general debate of the 65th UN General Assembly session Thursday, Wen underscored that China is still a developing country, with a GDP per capita of 10 percent that of developed countries.

China has maintained a favorable balance against the US and European Union nations, but has a trade deficit with Japan and South Korea, an indication that trade imbalance between China and the US could not be explained by the yuan's exchange rate, Wen said.

Analysts claim that US consumers are against a yuan appreciation because if the Chinese currency appreciates, the price of Chinese products in the US would rise. And US products might not become more competitive, as products from other developing countries such as Vietnam and India may seize the opportunity to enter the US market in large quantities, they say.

As China is not a net provider of demand, the impact of appreciation on the country would be much bigger than on the rest of the world, Michael Pettis, an expert on the Chinese economy at the Beijing-based Carnegie Endowment for International Peace, told the Global Times Friday.

One of the consequences of a rising yuan is that the cost of consumption and the benefits of production will increase, Pettis added.

"The countries with a large trade deficit will see a correct rebounding away from consumption toward saving, while China will see a rebound from saving toward consumption," he said.

He Maochun, director of the Research Center for Economic Diplomacy Studies at Tsinghua University, told the Global Times that if the yuan appreciates drastically, it will harm the economies of China and other countries.

With the yuan's appreciation, the competitiveness of Chinese enterprises relying on exports would decrease, and all countries, especially the main markets for Chinese products, would face higher import costs, He said.

"A big percentage increase, such as 20 percent, would bring more harm than benefit."

Li Daokui, a member of the Monetary Policy Committee of the People's Bank of China, the central bank, said at the 2010 China CEO Forum, held Sunday in Beijing, that in the next 10 years, trade protectionism toward China and India will continue to increase, along with the pressure on the yuan. But China is not a country that completely depends on the overseas market, and therefore the yuan will not be appreciated due to external pressure, Li added.

Pettis said trade relations between China and the US will continue to worsen.

"I don't see any hope for optimism," Pettis said. "And I'm pessimistic about trade relations everywhere, not just between China and the US."

Pettis said the pro for China is that appreciation will decrease the export sector and increase the household income sector, the share of which has declined very dramatically in the last 10 years; while the con is that if appreciation occurs too quickly, it will put the export sector at risk of bankruptcy.

"That would hurt household income because it would hurt the employment situation," he said. "So the trick is to raise the currency at a correct rate. That's very hard to do."

Source: Global Times


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