Reposted from Politico

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The yuan a top concern for U.S.

Josh Boak  |  May 1, 2012  |  Politico

Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton head to China on Thursday for another round of negotiations about the economy and security — but don’t expect too much to be done about the exchange rate.

Given the role the economy is playing in the 2012 election, there’s huge pressure at home on the Obama administration to get the Chinese to raise the value of their currency against the dollar. That would help American factories go head to head against the Chinese manufacturing behemoth by creating more competitive pricing.

“Right now, the Chen case may take up all the discussion space,” said John Frisbie, president of the U.S.-China Business Council. “This could be a test of the relationship.”

Only about a month ago, the tone at Chinese ministries was positive ahead of the fourth round of the strategic and economic dialogue, Frisbie said. Continued progress was hoped for on China loosening up its investment barriers, giving U.S. companies greater access to 1.33 billion potential customers.

China has long pegged its currency to the dollar, depressing the value in order to boost exports to the U.S. and nurture its own manufacturing base. Labor unions, Democratic lawmakers and presumed Republican nominee Mitt Romney are crying foul, despite China’s letting the yuan increase relative to the dollar by 31 percent since 2005.

Sen. Bob Casey (D-Pa.) told POLITICO it’s a hot topic on the trail as he campaigns for a second term.

“When I talk about it, people nod their head,” said Casey, also chairman of the Joint Economic Committee. “Executives, the business leaders, who might not be on the same page as me, shake their head [in agreement]. Because we’ve seen it over a decade or more.”

The Obama administration needs to push China harder, he said, because the progress so far has yet to help blue-collar workers ravaged by the exodus of factory jobs.

“I just hope they can keep the pressure on,” Casey said. “We’re anxious for results. I hope there’s something very specific when they come back, that they can at least report development where they can light the pathway forward. A lot of Americans are waiting for substantial movement.”

Romney has pledged to name China a currency manipulator, and a bill passed by the Democratic-majority Senate last year would require tariffs on Chinese goods if the yuan is being suppressed. The bill has not moved in the Republican-controlled House, nor has it garnered support from a White House eager to avoid a trade war with the country’s biggest lender.

Treasury delayed submitting a semi-annual report to Congress last month on whether China, among other trading partners, should be labeled as a currency manipulator, saying in a statement it would wait until after the negotiations ended.

Geithner also recently praised China for taking “very significant and very promising” steps to let market forces play a greater role in setting the exchange rate, comments that drew withering criticism from the Alliance for American Manufacturing, a group backed in part by the United Steelworkers.

Geithner has since responded by talking a bit tougher, saying in a speech in San Francisco last week that China’s interest would be to let the yuan (currently equal to about 16 cents) appreciate further, since that would give it more independence and flexibility to deal with inflation.

But Geithner’s primary concern remains ending the grip that state-owned enterprises have on the Chinese economy. Government-controlled banks should pay higher interest rates on their deposit accounts, allowing Chinese consumers to save less and spend more, Geithner said. That would be a shift away from an export-oriented model that fueled China’s rise but appears unsustainable.

Similarly, the Chinese government needs to treat all companies equally, instead of providing advantages to domestic firms that have hurt American businesses trying to break deeper into the market, Geithner said.

The problem for the administration is that neither of these issues taps into mailers and advertisements voters will be watching in the months head about currency manipulation and the deficit causing the government to be mortgaged to China, said Jason Roe, a Republican campaign strategist with Revolvis Consulting.

But both countries still have an incentive to show some cooperation.

“The big picture of why we schlep all these people out to Beijing — you can’t send these people out there without expecting some short-term payoff,” said Matthew Goodman, a former Obama White House official on Asian economic matters who now holds a post at the Center for Strategic & International Studies. “My sense for this particular session is they’re trying to lower expectations.”