China’s Currency Modification Will Have Little Impact

Despite China’s announced plans to permit its currency to float, textile and other manufacturers
don’t see much of an impact on what they see as a major international trade subsidy as a result of
China’s currency manipulation. Even Chinese government officials have warned the action will not
have much of an effect on trade. China’s central bank issued a statement saying, Certain foreign
media have misled the public and even wrongly speculated that the revaluation by two percent was
only the first step in a series of adjustments. The action does not in the least imply an initial
move which warrants further actions in the future.

Although conceding that the move was a step in the right direction, South Carolina Rep. John
Spratt, the assistant House Democratic leader and ranking member of the House Budget Committee,
said the small percentage change is not enough to affect the US $162 billion trade deficit with
China. Spratt is one of the sponsors of legislation that would levy tariffs of 27.5 percent on
goods from China if the Chinese government does not allow its currency to float on the open market.
He said China’s currency is undervalued at between 15 and 40 percent, and as a result, China’s
exports to the United States area cheaper and US exports to China are more expensive. The result,
he said, is that We do not have a level playing field for our manufacturing firms and we are going
to lose the manufacturing sector and some of the best jobs in our economy. On the other hand,
retailers said they hoped the move would ease concerns in Congress over the currency discrepancy.
Eric Autor, vice president of the National Retail Federation, said: To the extent that this
alleviates concerns on Capitol Hill, retailers may feel more comfortable about ordering merchandise
from China. A number of major retailers have limited orders in recent months because of the
unpredictability brought by safeguards cases, pending legislation and other moves to restrict trade
with China. Retailers are looking for stability and predictability. Knowing that a major order wont
be blocked by political decisions is more important than minor fluctuations in price brought by
currency revaluation.

July 2005