By  on February 1, 2005

NEW YORK — The growing debate over the almost $150 billion U.S. trade deficit with China has domestic manufacturers, lobbyists and two U.S. senators focusing on that country’s fixed currency exchange rate, which they maintain artificially lowers the price of Chinese goods by as much as 40 percent.

China’s exports to the U.S. have shot up 75 percent since that nation joined the World Trade Organization in 2001, prompting calls for the Bush administration to take a tougher stance.

The demands have caught the attention of Sens. Charles Schumer (D., N.Y.) and Lindsey Graham (R., S.C.) — two men with opposite political alliances but shared concerns on the currency issue — who plan to introduce legislation that would impose a 27.5 percent tariff on all Chinese imports to offset the undervaluation. They want China to allow its currency to float freely, meaning that its exchange rate with the dollar would be set by overall market forces, rather than managed by the central government.

Schumer and Graham hope that floating the yuan would cause it to rise in value from its current level of 8.28 yuan to the dollar, making Chinese exports to the U.S. seem comparatively more expensive. That might slow the loss of U.S. manufacturing jobs and even make it possible for U.S. companies to export more to China.

But experts warn that’s not necessarily what would happen.

Economists determine whether a currency is fairly valued by comparing the cost of a variety of commodity products. China’s current exchange rate suggests that an item that costs $1 in the U.S. should cost 8.28 yuan in China. On average, goods cost less than that, which is why economists consider the yuan to be undervalued by 10 to 40 percent.

But they caution that even currencies that float freely often may be overvalued or undervalued relative to one another. It’s the same effect that tourists experience when traveling abroad. When the dollar is stronger than the euro, a European vacation seems more affordable to Americans. When the euro is stronger than the dollar — as it is now — European tourists find America a more attractive option.

China manages the exchange rate by buying up U.S. currency and debt, and issuing new yuan to pay for those purchases. That has the effect of pushing down the supply of dollars while increasing the supply of yuan. It also means that China has extensive holdings of U.S. currency and treasury bills. According to the National Association of Manufacturers — a lobbying group that’s been particularly vocal in calling for a revaluation of the yuan — China’s reserve of U.S. currency now comes to about $600 billion.

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