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Congress Urges China To Revalue Currency
Volume 696
March 18, 2010

Attempting to pressure China to raise the value of its currency, U.S. lawmakers introduced legislation this week that could lead to retaliatory trade barriers against Chinese-made products. Backed with bi-partisan support, the bill's sponsors have accused China of unfairly manipulating the value of the yuan to gain a global advantage in exporting, in effect stagnating the world's economies. Congressional leaders and many analysts believe the yuan is undervalued, compared to the dollar, by as much as 40%. "President Obama has outlined a plan to double exports but you simply can't do that if you don't address the currency issue," said Ohio Senator Sherrod Brown on Tuesday. "China's current policy is out-and-out protectionism."

If the Chinese government does allow its currency to appreciate, analysts widely agree the move would benefit the U.S. economy, creating a more competitive trade market, while potentially generating hundreds of thousands of American jobs. However, at least in the short term, some suppliers in the ad specialty industry believe raising the yuan's value would result in rising prices on goods imported from China – and possibly a drop in product quality. "We would see costs increase and potentially quality decrease because suppliers will feel forced to buy cheaper products to keep prices steady," said Jeff Lederer, executive vice president of Counselor Top 40 supplier Prime Line (asi/79530).

Jonathan Isaacson, president of Counselor Top 40 supplier Gemline (asi/56070), believes that the change is something the industry should definitely brace for. "It will have the immediate affect of increasing the cost of doing business in China," he says. "Regardless of when the currency starts to move, and it is a ‘when' and not an ‘if' for this shift, any change in the China exchange rate will have a meaningful impact on the cost of a significant portion of the merchandise sold in our market."

While publicly Chinese officials have rebuffed U.S. claims of currency manipulation, many economists expect China to eventually cede to growing international criticism, partially at its own benefit. If the yuan appreciates, analysts say China would gain greater protection against inflation, a strategy employed by the Asian superpower as recently as 2008. If, instead, China maintains the yuan's value, it could counter American duty threats by dumping U.S. Treasury bonds, weakening the dollar and adding to financial unrest. "We oppose mutual accusations between countries, and even using coercion to force a country to raise its exchange rate, because that's of no help to reforming the yuan exchange rate," said Chinese Premier Wen Jiabao at a news conference this week. "The responsibility for the serious disruption in U.S.-China ties does not lie with the Chinese side but with the U.S."

Currently, the U.S. trade deficit with China is roughly $227 billion, rising rapidly from $83 billion in 2000. If the yuan appreciates, analysts predict a gradual value increase of no more than 5% in 2010.

 

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