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U.S. threat to get tough with China could imperil retail bargains

BOWIE, Md.—Lou Ann Holderness shops at Wal-Mart for the low prices. Like millions of Americans, she's indifferent to accusations that China manipulates its currency to make Chinese-made goods sold by U.S. retailers artificially cheap.

"I just buy. Isn't that terrible?" she said sheepishly, heading into a Wal-Mart store in the Washington suburb of Bowie. "I keep an eye out for bargains."

The Bush administration and Congress may take the bargain out of such bargain shopping. Congress threatens trade penalties of up to 27.5 percent on everything China exports to the United States unless Beijing revalues its currency. The administration is warning China that it must take action soon or face rising protectionism in the United States. Any penalties imposed on China could punish Wal-Mart and American consumers, too.

Here's how. Wal-Mart is the nation's largest retailer. Wal-Mart officials in China frequently boast that if the retailer were a country, it would be China's eighth-largest trading partner. Last year, Wal-Mart accounted for nearly 10 percent of the $197 billion in U.S. imports from China.

At Wal-Mart headquarters in Bentonville, Ark., spokesman Bill Wurtz was quick to note that Wal-Mart's $18 billion in imports from China pale compared with the $150 billion in goods and services it purchased last year from American companies.

But $18 billion is still a sizable chunk of inventory for a company with annual sales that exceed $285 billion. Wal-Mart itself imported $9 billion worth of goods from China in 2004, and its suppliers imported another $9 billion worth, Wurtz said.

Given those volumes, any government-imposed price increase on Chinese-made goods would hurt. And Wal-Mart wouldn't be the only one to feel the pain.

"China is a major producer. It is either the number one or one of the top producers of a whole range of consumers goods: clothing, shoes, consumer electronics, toys, housewares, furniture, and the list goes on," said Erik Autor, a vice president of the National Retail Federation in Washington.

The retailers' group opposes efforts to penalize China for its currency policy. U.S. Commerce Department and International Trade Administration data show why: Chinese-made goods accounted for 81 percent of American toy sales and 72 percent of U.S. footwear sales last year.

Consumers crowding the Wal-Mart store in Bowie, nestled between Baltimore and the nation's capital, expressed surprise on learning that the retailer sells so much from China.

"Reeaally?" Paulette Williams asked when she was told that Wal-Mart accounts for a tenth of all U.S. imports from China.

Like many Americans, she seldom checks to see where products were made.

"Maybe I should. I love my country, but I don't know," Williams said, pausing in midsentence to think, then concluding that "value in prices," not country of origin, determines what she buys.

That "value in prices" is at the heart of the dispute with China.

The Bush administration and Congress think that China's refusal to revalue its currency amounts to a subsidy that gives its products a leg up on global competitors. They think it partially explains why China's trade surplus with the United States was $162 billion in 2004, a record.

China stands out because of its controversial fixed-exchange rate. The United States, the European Union, Japan and other large economies let currency markets set the value of their currencies against one another. But China, despite being the world's fastest-growing economy, fixes the value of its currency, the yuan, against the dollar. A dollar buys about 8.3 yuan today, as it has for about a decade.

"By rigging its currency between 15 and 40 percent below its appropriate value, China is giving a subsidy to its imports to the United States and imposing a direct cost on U.S. exporters to China," Sen. Charles Schumer, D-N.Y., said in a statement.

Schumer authored an amendment supported by 66 other senators that gives the United States and China 180 days to negotiate over the currency issue. If at the end China fails to revalue the yuan, a temporary across-the-board compensatory tax of 27.5 percent would be levied on all imports from China. That figure is the midpoint in economists' estimates of the yuan's undervaluation.

Treasury Secretary John Snow warned China on May 17 that it had six months to take significant steps on its exchange rate or face unspecified consequences.

On Thursday, Snow took that a step further, saying China should "move without delay" to revalue its currency. In testimony before the Senate Finance Committee, Snow said China had taken all the technical steps necessary to prepare its financial system for the currency adjustment and if it didn't act soon, the Bush administration might label it as a currency manipulator, paving the way for punitive action.

The National Retail Federation thinks many senators joined the Schumer legislation to posture for voters back home, believing that it won't pass. If it does pass, lawmakers could face unpleasant consequences.

"This really is a 27.5 percent sales tax on U.S. consumers," said Autor, the retail federation's vice president. "Those anti-tax Republicans who are supporting Schumer don't understand they are supporting a huge tax increase for American consumers."

China says that although it's preparing to change its exchange-rate regime gradually, it won't do so under duress.

London's Financial Times reported Tuesday that the Bush administration used former Secretary of State Henry Kissinger and former National Security Adviser Brent Scowcroft as unofficial envoys to China. Their message: Revalue the yuan by at least 10 percent to show good faith and avoid protectionist legislation in Congress.

Tony Fratto, a Treasury Department spokesman, wouldn't discuss particular individuals, but told Knight Ridder that "it is important for the Chinese authorities to hear from respected individuals who can provide an accurate analysis of the American political environment on this issue."

If China did that, it might ease the U.S. heat on China, but it wouldn't do much to change the trade imbalance, said David Solin, a currency analyst at Foreign Exchange Analytics in Essex, Conn.

A 10 percent adjustment of the yuan could make Chinese-made goods and components cost 10 percent more for American buyers. But cheap labor and other production advantages would still leave Chinese goods 30-40 percent cheaper than those of U.S. or European competitors, Solin said.

"There is no way the U.S., or for that matter much of the rest of the globe, can compete with China in terms of production costs," Solin said.

On a trip to China earlier this month, Thomas Donohue, the head of the U.S. Chamber of Commerce, the nation's premier organization representing American business, received assurances from Chinese leaders that they intend to revalue the yuan and address widespread counterfeiting and copyright violations.

Donohue supports the Bush administration's decision to give China a six-month deadline to show results.

"If we get to November and they're stonewalling on all these things, you are going to find me turning up the heat," he said.

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(c) 2005, Knight Ridder/Tribune Information Services.

PHOTOS (from KRT Photo Service, 202-383-6099): WALMART-CHINA

GRAPHIC (from KRT Graphics, 202-383-6064): 20050526 WALMART CHINA

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