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Bound for Beijing

The focus should be on property rights, not on currency, in U.S. talks with China.

December 14, 2006

OVER THE LAST two years, Congress has considered 27 bills calling for trade sanctions against China. Given that many newly elected Democrats ran on protectionist platforms, it's safe to bet that relations stand to get testier. That's the worrisome backdrop to Treasury Secretary Henry Paulson's trip to Beijing this week.

Paulson, other top Bush administration officials and Federal Reserve Chairman Ben S. Bernanke arrive in the Chinese capital today for the first in a new series of semiannual economic chats. In some ways, the rising protectionist tide in the U.S. will make their job easier -- they can credibly warn that China faces a backlash unless it makes concessions. Trouble is, the Chinese don't respond well to that kind of pressure, and many in Congress have unrealistic expectations.

Too many members of Congress are obsessed with the value of China's currency, which that nation has largely pegged to a fixed rate of exchange to the U.S. dollar. Yes, it would be nice if Beijing didn't keep the yuan so artificially undervalued, and allowing it to appreciate would undoubtedly help reduce the U.S. trade deficit with China. Democrat Charles E. Schumer of New York and other senators at one point threatened to impose a 27.5% tariff on all Chinese imports if the yuan weren't allowed to float freely.

But it's a mistake to believe, as many in Washington seem to, that a 20% or so appreciation in the currency's value would significantly alter the long-term nature of the trading relationship.

Lost in all the angst over China's currency is the fact that the world economy has benefited enormously from the economic stability in China, which stems in part from its stable currency. But this isn't surprising. With Washington's simplistic focus on monthly trade deficit figures, all beneficial aspects of the U.S.-Chinese economic interdependence tend to get overlooked.

Paulson should by all means nudge China to allow for more fluctuation in the yuan's value, but it's not an issue worth triggering a catastrophic trade war over.

Indeed, Paulson and company should be more focused on those areas in which China has failed to meet its obligations under the World Trade Organization (which does not referee disputes over currency valuations).

China joined the club five years ago but has been slow to live up to its commitments. Beijing's claims that it has cracked down on intellectual property violations, for example, are laughable. Piracy of U.S. software and entertainment is rampant; it's impossible for the WTO to even review China's anti-piracy efforts because Beijing won't provide the needed information. China also limits some imports if they aren't made with Chinese materials and imposes arbitrary curbs on agricultural products in the name of health standards.

The Bush administration has to make the Chinese leadership understand that although a lot of the anti-China hysteria on Capitol Hill may be overwrought, the United States will challenge Beijing at the WTO if it continues to flout the rules of international trade.

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