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Tensions Flare Between U.S., China After Push for Revalued Currency

The Obama administration has placed pressure on China to revalue its currency, creating economic tensions between the two countries. Ray Suarez sits down with C. Fred Bergsten, director of the Peterson Institute for International Economics, about this latest turn of events.

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    Next: Tensions over currency flared again today between China and the U.S.

    RAY SUAREZ has the story.


    For months, the Obama administration has been working behind the scenes to persuade the Chinese government to adjust its tightly controlled currency, the yuan. There had been some hope of movement before a major summit next weekend, but, today, positions seemed to harden.

    White House spokesman Bill Burton said the global economy would be better off if Beijing allowed the yuan to rise in value. The Chinese vice foreign minister responded in turn, saying, China's currency is not an issue the international community should discuss.

    To help decipher what's happening and what's at stake, we're joined by Fred Bergsten, the head of Peterson Institute of International Economics.

    Well, the White House didn't release this in some obscure communique. A spokesman said it to the press corps on Air Force One, getting an immediate response from the vice premier in charge of organizing the Chinese presence at the G20. What is behind this exchange?

    FRED BERGSTEN, director, Peter G. Peterson Institute for International Economics: Moreover, President Obama sent a letter yesterday to all the heads of the G20 countries indicating a need for a number of changes in economic policy, including in the Chinese currency.

    The problem is that the G20 strategy agreed over the last two years in response to the global crisis includes a big element of so-called rebalancing the world economy.

    The U.S. runs huge trade deficits. China runs huge trade surpluses. That transfers jobs from the United States to China. It hurts our economic recovery. And it also means that China has to put a lot of money into the U.S. to finance the imbalance.

    That big inflow of capital kept our monetary conditions easy, our interest rates down. That was a big factor leading to the over-borrowing and over-lending that produced the global crisis. So, on both the trade side and the financial side, these big global imbalances are poison. The administration here has wanted to get rid of them.

    The G20, including the Chinese, have said they would agree to do it, but there's been precious little action to achieve the desired outcome.


    Just a couple of weeks ago, an enormous American delegation that included the secretary of state, the secretary of the treasury, the chairman of the Federal Reserve, were all in China, pressing on this same issue, getting very little.

    Why come back to it so soon? It's been on the burner for seven years.


    The Chinese sent some very strong signals back in March and April that they were going to let their currency start rising again. As a result, Secretary of the Treasury Geithner backed away from issuing a report that was required by the Congress in mid-April which would have forced him to label China a manipulator of its foreign currency, which they clearly are.

    But he backed away. He gave them a pass. He took their signals that they were going to move, but gave them kind of a deadline. And the end of the deadline period was this G20 summit coming up a week from now. So, we're just about at the end of the open period, and the signal now from the White House is, China, it's time to move. If you don't do it in the next few days, you're going to get some pretty sharp pushback from here.


    Well, the Chinese did some sharp pushback on their own and said this is China's currency. It's not a fit discussion for the — for the world community. Are they signaling that they're just not going to give in on this?


    They never want to give in to the foreign pressure, and that's why it's peculiar that they have waited to let the thing boil up again.

    The Chinese statement on its face is ridiculous. For the Chinese to say the currency is not an international issue is fraudulent. A currency relationship, by definition, is the price between the Chinese yuan, the America dollar, the European euro, various currency. It's the quintessential international issue , because any exchange rate has two sides. So, it has to be worked out internationally, either by markets or governments or some combination.

    So, the Chinese are barking up the wrong tree with that. It has clearly been a major issue of international discussion, as you said, for seven years. And it's been part of the agreed international strategy to deal with these imbalances. But now the Chinese are just not fulfilling their part of the deal.


    Well, for a long time, there have been 6.8 yuan to the dollar.



    Not much change, no matter what changes between the United States and China.

    What's been the Chinese interest in keeping it at this level? What are they defending by not allowing their currency to float?


    The Chinese are keeping their currency priced much more cheaply than market forces or economic fundamentals would suggest.


    So, there would be fewer yuan to the dollar if it was allowed to float?


    Exactly, a lot fewer, 20 percent fewer, 25 percent fewer, a big number.

    Keeping their currency cheap means that the prices of their exports are kept correspondingly cheap in world markets. And that gives them a further competitive advantage to grow their economy by expanding exports.

    Likewise, it over-prices imports. It means that dollars are pretty expensive for them to go into the market and buy to get imports from us or somebody else. So they import less than they should. And the result is more Chinese exports, fewer Chinese imports, a humongous trade surplus.

    That transfers economic activity from the rest of the world, including the United States, to China. That's what we call exporting unemployment or exporting your problem to other people.

    The irony, is the Chinese don't need it. They're hugely competitive anyway. And a stronger currency would be much in their interest. Right now, China is very worried about inflation. Their inflation rate's popped up to 7 percent or so. They're worried about overheating. They're starting to step on the brakes.

    Letting the value of the currency rise would help that. It would make imports cheaper. It would dampen demand for their exports. It would be just what the doctor ordered.

    So, it's actually quite puzzling that they do not see the light and implement what they have said for five years they're going to do, reduce their trade surpluses, let the currency follow more market-oriented prices.


    We have got just a very short time left. Where do you see this issue headed?


    I'm afraid it's headed for a big dust-up. The Chinese are now digging in their heels again, as you said. If there's no action through this G20 meeting a week from now, there's going to be big pushback from here.

    The secretary of the treasury will have to issue this report. I think he will have to label China a currency manipulator, which they will hate. Whether he does or not, the Congress is very unhappy. Senator Schumer and others are ready to pass legislation which would, at a minimum, require the U.S. to take account of this cheap currency in deciding whether to put countervailing duties and new import barriers on Chinese trade.

    I think the next step might be some disruption in the trade flows between the two countries if China remains as defensive as it is.


    Fred Bergstein, good to talk to you.


    Good to be here.

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