By  on June 24, 2005

WASHINGTON — Federal Reserve Board chairman Alan Greenspan warned Congress Thursday that imposing tariffs on Chinese imports would have a negative impact on the U.S. economy and pressuring China for a more flexible exchange rate would not boost manufacturing and jobs.

Greenspan, appearing before the Senate Finance Committee, clashed on monetary policy with Treasury Secretary John Snow, who also testified. Snow agreed that trade sanctions would be a mistake.

The Fed chief engaged in tense exchanges with senators who said China's trading practices have driven up the U.S.-China trade deficit and decimated the manufacturing base.

"Some observers mistakenly believe that a marked increase in the exchange value of the Chinese [yuan] relative to the U.S. dollar would significantly increase manufacturing activity and jobs in the United States," Greenspan said. "I am aware of no credible evidence that supports such a conclusion."

China has maintained an exchange rate of 8.28 yuan to $1 since 1995. U.S. manufacturers and many lawmakers charge that China artificially undervalues the yuan, lowering prices of exports by as much as 40 percent and putting U.S. companies at a competitive disadvantage.

Greenspan said China should continue moving toward a more flexible exchange rate because it would be "helpful to China's economic stability and hence to world and U.S. economic growth."

Snow took a harsher view, telling the committee, "If current trends continue without substantial alteration, China's policies will likely meet the technical requirements of the statute for designation" as a "currency manipulator," which might lead to World Trade Organization sanctions.

Sen. Jim Bunning (R., Ky.) asked Snow why China doesn't already meet the requirements of being a currency manipulator.

"It is only recently that we concluded that progress in China with respect to its banking system and financial institutions, and modernization of the way its financial infrastructure works, achieved sufficient robustness that it could accommodate flexibility," Snow replied.

"It's time for them to move and we've made it clear in no uncertain terms that it's time for them to move," Snow said of the Chinese.

Bunning responded, "I hope the Congress of the United States doesn't have to force you to make that move."Greenspan and Snow said several legislative proposals for sanctions against China's trading practices would be "counterproductive." Congress is reviewing six bills that would impose sanctions or change U.S. laws to allow companies to file countervailing duty cases against China if it doesn't reform its currency policy.

One measure discussed at the hearing, sponsored by Sens. Charles Schumer (D., N.Y.) and Lindsey Graham (R., S.C.), would mandate an across-the-board tariff of 27.5 percent on Chinese imports if the yuan isn't revalued over a set period of time.

"After years of inaction, we are frustrated," said Schumer, who said failing to convince China to "play by the rules of the game" will lead to a "withering away" of global support for free trade.

Greenspan said, "The problem with putting a tariff of 27.5 percent at the end of the process ... is that if it ever gets implemented ... the consequences will be extraordinarily negative."

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