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Chinese Monetary Policy Ignores Concerns of Global Trading Partners

Undervalued Yuan Continues to Grow the U.S./China Trade Deficit and Suppress American Jobs

(Washington, D.C.) (January 12, 2005)—A coalition of organizations committed to maintaining a strong industrial base today noted that the U.S. bilateral trade deficit with China is on a trajectory to eclipse the $160 billion annual mark, reflecting the effects of the continued undervaluation of the Chinese yuan.

The China Currency Coalition, responding to today’s Department of Commerce release of its November 2004 analysis of trade in goods and services, maintains that increased imports from China continue to adversely impact American jobs, particularly in the manufacturing sector. At 14.4 million in December, manufacturing jobs declined more than 1.3 million since December 2001 or more than 400,000 per year.

“China’s undervalued exchange rate is responsible for the large and growing bilateral trade deficit and lack of job creation in the U.S. manufacturing sector,” said coalition spokesman David A. Hartquist. “American manufacturers and workers cannot compete when Chinese products enjoy a subsidy of up to 40%; when our exports face what is in effect a 40% protectionist tariff; and manufacturers are being enticed to move to China by the incredibly cheap yuan.”

The U.S.-China trade imbalance is by far the largest compared to other trading partners. Commerce reported that the monthly trade deficit with China declined to $16.6 billion in November 2004, only a slight decline from $16.8 billion in the previous month. Historically, November is a month when seasonal factors result in a significant decline in the monthly deficit.

China’s undervalued exchange rate also threatens its economy and the global financial system, according to the coalition. The undervalued exchange rate caused China’s foreign exchange reserves to increase by over $200 billion last year to a cumulative total of more than $600 billion. More than half of last year’s increase was incurred in the last three months. These levels would have been higher but for the infusion of $45 billion in reserves to recapitalize two major banks in China. Much of the increase in the reserves derives from the burgeoning trade surplus, which China underestimates in the order of 200 percent. In addition, because of the cheap yuan, foreign direct investment also expanded to $57 billion in 2004, the highest level in Asia. As a result, China’s economy is overheated, requiring the government to take extraordinary measures to neutralize the effect of surging foreign exchange reserves.

The China Currency Coalition is an alliance of industry, agriculture, and worker organizations whose mission is to support U.S. manufacturing by seeking an end to Chinese currency manipulation.

David A. Hartquist is a senior member and head of the International Trade and Customs practice at the Washington, D.C. law firm of Collier Shannon Scott PLLC.

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