Geithner Hints at Harder Line on China Trade
China Manipulating Its Currency
JACKIE CALMES / New York Times 23jan2009
WASHINGTON — Timothy F. Geithner, who moved closer to confirmation as Treasury secretary on Thursday, told senators that President Obama believed China was “manipulating” its currency, suggesting a more confrontational stance toward that country than under the Bush administration.
Mr. Geithner’s comment was made in writing to the Senate Finance Committee hours before it voted 18 to 5 to recommend that the full Senate confirm him. The statement, which is certain to anger the Chinese government, comes at a particularly sensitive time, with economies in both the United States and China weakening and tensions already rising around the globe over trade. The United States, moreover, is increasingly dependent on China to finance its ballooning deficit.
An administration official said that Mr. Geithner was only repeating what Mr. Obama had said during the campaign, and pointed out that his statement also emphasized that the president intended to use “all the diplomatic avenues available to him” to address the currency question.
It remained unclear whether Mr. Geithner was signaling that Mr. Obama would officially declare later this spring that China was engaging in currency manipulation, when the administration is required by a 20-year-old trade law to report to Congress on exchange rate issues. Such a finding would begin a legal process that starts with diplomacy and could end with the imposition of trade barriers like tariffs. The objective would be to persuade China to let the value of its currency, the yuan, freely float — a move that would let its value rise and would increase the cost of its exports.
“President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency,” Mr. Geithner wrote. He stopped short of charging that China is manipulating its currency intentionally to gain an unfair trade advantage, as the 1988 law requires for an official citation of currency “manipulation.”
Even so, the Obama administration’s restatement of that position in writing on its second day was immediately seen as significant. The Bush administration purposely did not use the term “currency manipulator” to avoid antagonizing the Chinese, even when it was criticizing China’s trade policies.
The more aggressive position will be popular with organized labor in the United States, a major supporter of Mr. Obama’s presidential campaign, and with many manufacturers who say China is purposely keeping its currency devalued against the dollar and leaving American exports at a competitive disadvantage against lower-priced Chinese goods.
“It’s huge,” said Simon Johnson, a former chief economist at the International Monetary Fund who is now a professor of economics at the Massachusetts Institute of Technology. “I’m very supportive in general and I think China needs to be called to account and the I.M.F. has not done it,” he said.
But, he added, “I have to say this is really a bit of an issue for Mr. Obama’s internationalist sort of theme for his foreign policy because this is going to be at least a spat with China, and if we don’t back down it’s then a row, and you know how that goes.”
Prices of Treasury debt fell modestly after news of Mr. Geithner’s comments, reflecting worry among investors that China might be less willing to buy United States debt if the new administration pushed the country to further revalue its currency. The yield on the 30-year bond, which moves in the opposite direction from its price, climbed to 3.247 percent from 3.159 percent on Wednesday afternoon.
Even before, yields on long-term government debt had been moving up in the last three weeks, as investors anticipated a significant increase in government borrowing.
The Obama official, who did not want to be identified because of the sensitivity of Mr. Geithner’s confirmation process, cited the Treasury nominee’s earlier oral testimony to the Finance Committee. “As Tim Geithner said, it is important for the United States and the world economy that our major trading partners operate with a flexible exchange rate system,” the official said, “in which market forces determine the value of exchange rates. The new administration is committed to using a fully integrated approach to bring this about in the current economic environment.”
As a senator, Mr. Obama supported legislation as recently as last year that would open the door to trade sanctions against China for currency manipulation.
Mr. Geithner’s statement was in response to a written question about the new administration’s stance that was submitted by Senator Charles E. Schumer, Democrat of New York, a vocal critic of China’s currency policies.
On Thursday, Mr. Schumer welcomed Mr. Geithner’s reply. “For the first two days, this is a big step” from the Obama administration, he said in an interview. “And I think it’s an indication: They are not going to be anti-free trade; they are not going to be for putting artificial barriers in the way. But when other countries do, they’re going to be much tougher on them.”
The National Association of Manufacturers, whose members have pushed previous administrations to get tougher with China, was pleased, but also cautious given the potential for a confrontation that could exacerbate global woes.
“You know the world has changed a lot with the financial crisis and China has a lot in U.S. Treasuries,” said Frank Vargo, vice president for international economic affairs at the manufacturers’ association. “This needs to be done in a cooperative, not a confrontational, way.”
Some market strategists said Mr. Geithner’s statement inflamed a contentious issue unnecessarily given that China’s exports and economy were slowing significantly.
“Things have changed quite a bit since Hank Paulson made an issue of this,” said one, Edward Yardeni, an independent analyst, referring to Henry M. Paulson Jr., the just-departed Treasury secretary. “The Chinese trade surplus is shrinking dramatically and China’s economy is falling into recession. I think it really wasn’t necessary. It doesn’t accomplish anything.”
Mr. Paulson initiated a round of strategic talks with the Chinese and, on his watch, the Chinese allowed the yuan to appreciate nearly 20 percent.
Mr. Geithner would be as aware of China’s sensitivity as anyone, and no one has suggested that he made his statement in error. Before taking his current post as president of the Federal Reserve Bank of New York, Mr. Geithner was a policy director at the I.M.F. Before that, he was the under secretary of the Treasury for international affairs in the Clinton administration, a crisis manager during the Asian financial crisis of the 1990s and a Treasury attaché to Japan. By his own description, Mr. Geithner’s expertise is in matters of currency exchange rates and monetary policy.
In his written statement to the Senate panel, Mr. Geithner further noted Mr. Obama’s support as a senator for “tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles.”
“The question is how and when to broach the subject in order to do more good than harm,” he added. “The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.”
The full Senate is expected to confirm Mr. Geithner, 47, as Treasury secretary on Monday. Some Republican senators blocked a vote for this week, given lingering objections about Mr. Geithner’s failure until recently to pay about $34,000 in payroll taxes on his income at the I.M.F. from 2001 to 2004.
He was roundly criticized in his Finance Committee hearing on Wednesday, but its bipartisan vote reflected members’ opinion that Mr. Geithner’s expertise outweighed his personal tax lapses. Those were “completely unacceptable,” said Senator Kent Conrad, Democrat of North Dakota. “In normal times that alone would lead me to oppose his nomination. These are not normal times.”
All the panel’s Democrats and five of the 10 Republicans voted for Mr. Geithner.
“I’m convinced he’s a person of great integrity even though he’s made these mistakes,” said Senator Orrin G. Hatch, Republican of Utah. But another Republican, Senator Michael B. Enzi of Wyoming, said, “I’m really disappointed that we’re even voting on this,” given that other nominees had been disqualified for less.
Vikas Bajaj contributed reporting from New York.