Bush urges China to adopt market-based currency rate

(Kyodo) _ President George W. Bush urged China on Wednesday to adopt a market-based currency rate and vowed to press major trading partners to open their markets as part of his efforts to reduce the huge U.S. trade deficit.

"In terms of the trade deficit, it is important for us to make sure that countries treat their currencies in market fashion," Bush said in outlining his policy agenda for the second term at a press conference. "I've been working with China, in specific, on that issue."

The Bush administration apparently wants China to adopt a floating exchange system or take other measures to raise the virtually fixed yuan rate.

U.S. legislators and business leaders have been complaining that the yuan's pegged rate is causing unfair competition with Chinese products and resulting in the record-high trade deficit with China that now accounts for about 40 percent of the overall U.S. red ink.

Bush also said he will make sure that other countries "knock down their barriers to our goods and services," while he continues to pursue "pro-growth policies" for "further economic expansion" and press for reforms to cut the huge U.S. budget deficit.

"Obviously, people in the capital markets are going to be watching the issue of twin deficits," Bush said.

Bush did not comment on his currency policy. But he has earlier said he remains committed to reducing the twin deficits as a signal to global markets that he favors a strong dollar.

The president reiterated his commitment to halve the budget deficit over the next five years, saying he will present his fiscal 2006 budget package next month to Congress showing how to attain the target.

On Tuesday, Bush announced that he intends to seek a supplementary budget for fiscal 2005, mainly for military operations in Iraq and Afghanistan. Administration officials said it will total $80 billion, making the fiscal 2005 budget deficit likely to hit a record $427 billion.

President George W. Bush urged China on Wednesday to adopt a market-based currency rate and vowed to press major trading partners to open their markets as part of his efforts to reduce the huge U.S. trade deficit.

I wonder why the president is urging China to adopt a floating rate for the yuan? As I run the numbers, I think that likely will only increase our trade deficit.

Normally, one would not expect such an increase in our trade deficit: if this were Europe or Japan, then one would expect a cheaper dollar would have a salutary effect.

However, Chinese prices are so radically skewed that even if they rise 25% in actual terms, they are still by far the cheapest available. There is no other tier that they will come into competition with, and unless we reduce the amounts we purchase, we will have to pay that additional 25% as far as I can see. As a hypothetical, if we buy 1 million washers from China each year at $150 apiece, and the price goes to $187.50, they still are far cheaper than American-made models at, say, $350. Unless we cut our purchases of washing machines, this just means more dollars sent outside the country for the same volume of goods.

As to our exports, I have seen nothing that convinces me that China is interested in buying much from us except for just a few things such as soy beans: it's not as if a Washington State apple will suddenly become affordable for a worker whose wage balloons from $0.14 per hour to $0.18 in dollar terms.

if we buy 1 million washers from China each year at $150 apiece, and the price goes to $187.50

You are assuming people will still buy that 1 million machines; they won't, some of us will just not buy a machine or put off the buying of a machine for a just a little longer or have our current one machine repaired.

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