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Economic issues at forefront as Hu visit draws near

WASHINGTON—As Chinese President Hu Jintao prepares to visit America next week, he knows he'll face hostile fire on trade and the global economy.

Congress is threatening to impose import tariffs, the Treasury Department is considering branding China a currency manipulator and the U.S. trade representative just filed a complaint accusing China of distorting global trade in auto parts.

While the United States remains concerned about a range of political and security questions involving China, this year public attention is focused mostly on economic issues. Despite its growing wealth and the leverage that brings, China has a public-relations problem in its largest market, the United States.

Frank Vargo, the vice president of international affairs for the National Association of Manufacturers, is blunt: "I think they've blown it . . . as far their image is going, it's certainly going downhill."

That's tough talk from a group with many members who have robust operations in China, now the world's hottest developing market.

"We have members who say, `Well, China is our biggest market. Don't upset the relationship,' " Vargo said. But now, he said, all members agree to say with one voice that China's economy should be "as market driven as possible."

One key area where China's economy isn't "market driven" is its exchange rate. Most developed nations let international markets determine the value of their currencies. The Chinese government, however, fixes the value of its currency against the dollar.

Critics charge that China's fixed currency, combined with extremely low wages, makes Chinese-made goods artificially cheap in the global market, at the expense of goods made in America and other nations whose currency values are set in open markets.

The fixed exchange rate, pegged around 8 Chinese yuan to the dollar, is a primary reason for last year's $202 billion U.S. trade deficit with China, an all-time high. On Tuesday, China released statistics showing an $11.2 billion trade surplus with the United States for March, and $23.3 billion for the first quarter of 2006, up 41 percent over the same quarter of 2005.

President Bush said Monday that dialogue with China had improved but that last year's massive trade deficit with China had ordinary Americans asking, "Where's the equity in trade?"

Hu could ease tensions, Bush said, by telling Americans on his visit, which begins next Tuesday, that China is willing to revalue its currency.

Sens. Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C., are sponsoring legislation that would slap a 27.5 percent tariff on Chinese goods if China doesn't significantly revalue its currency. The proposal has bipartisan support, but Schumer and Graham say they'll wait until fall to see if China acts on its own before they seek congressional passage.

China has said it needs to get its banking system up to international standards before it can let markets value its currency, but critics say it's just stalling.

"The legitimacy of the Chinese regime is tied up in producing continuous economic growth, and anything that may disturb that is a life-or-death political issue for them," said Clyde Prestowitz, a former American trade negotiator and China critic. "Anything that might disturb that, like a significant yuan revaluation, they're not even going to think about."

If the United States imposed tariffs on Chinese goods, it could provoke a trade war that could harm both economies. Cheap Chinese computers, electronics and garments snapped up by U.S. consumers hold down inflation, which helps Americans stretch their paychecks further.

China's fixed currency also helps fuel the rapid growth of its economy, now the world's sixth largest. This month China announced that it's passed Japan as the world's largest holder of foreign currency reserves, with some $853 billion as of February.

China uses its surplus cash to leverage relations with Washington. For example, Hu is expected to announce some $15 billion in purchases of U.S. goods during his visit, including a stop in Seattle to announce the purchase of Boeing aircraft.

China also spends in ways that affect ordinary Americans. Since 2001, China increasingly has invested in U.S. Treasury bonds, despite low rates of return. It held some $262.6 billion in U.S. Treasuries as of January, the Treasury Department reports.

Many U.S. economists think that China isn't buying them simply as investments. Because Treasury bond rates serve as benchmarks for American commercial loans, by accepting low T-bill rates the Chinese government is helping to keep U.S. bank rates down on consumer loans and home mortgages. That lets American consumers borrow more, boosting U.S. growth and permitting greater American consumption of Chinese imports.

But it also gives China leverage. Global bond markets were rattled in early April after Cheng Siwei, a senior official in the Chinese legislature, suggested simply that China should cut back the amount of U.S. debt it holds.

While China has enormous interests in doing business with Washington, it lists only 17 lobbyists in the American capital under the Foreign Agents Registration Act. Instead, it counts on U.S. corporations such as Caterpillar Inc. to help make its case.

"It's time to curb the rhetoric and focus more on engagement. We know that unilateral sanctions rarely work—and in this case would be completely counterproductive," Jim Owens, Caterpillar's chief executive officer, said in a speech March 28 at Beijing's Tsinghua University. His words sent a message to Beijing and the American Congress.

James Sasser, the U.S. ambassador to China from 1995 to 1999, describes the U.S. and Chinese economies as increasingly symbiotic.

"As the two economies have become much more intertwined and mutually dependent on each other, what you're seeing is American business and financial interests moving in the direction of trying to keep the era of good will going," said Sasser, who now advises U.S. CEOs on doing business in China. "They don't want any sharp disputes that can have economic fallout with the Chinese."

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(c) 2006, Knight Ridder/Tribune Information Services.

ARCHIVE PHOTOS on KRT Direct (from KRT Photo Service, 202-383-6099): Hu Jintao

GRAPHICS (from KRT Graphics, 202-383-6064): 20060411 USCHINA econ

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