Smith Faculty Opinion Article	May 12, 2006
By Dr. Peter Morici, Professor of International Business EMAIL WEB SITE

Bush Administration Capitulates to China in Currency Report

The Treasury Department today released its long awaited report on the International Economic and Exchange Rate practices of major U.S. trading partners.

Regarding China, it concluded that far too little progress has been made in introducing exchange flexibility however the Treasury Department is unable to determine, from the evidence at hand, that Chinas foreign exchange system was operated during the last half of 2005 for the purpose (i.e., with the intent) of preventing adjustments in Chinas balance of payments or gaining China an unfair competitive advantage in trade.

It would seem that Secretary Snow would like China to volunteer that it is manipulating the global commercial system before it can cite it.

In 2005, Chinas central bank purchased $206 billion in foreign currencies and securities that came to about 9 percent of Chinas GDP. Those purchases put into the hands of foreign consumers yuan equal to about one-third of Chinas exports.

Essentially, Chinas currency market intervention created a 33 percent off-budget subsidy on Chinese exports. If that is not an unfair competitive advantage in trade one must wonder what would qualify as such in the minds of U.S. Treasury officials.

While the Administration did express disappointment with the slow progress of Chinese currency market reforms, the most commendable aspect of this report is how eloquently Secretary Snow made the case for Beijing.

As per usual, the Administration warned against perils of protectionist responses toward China. Perhaps President Bush and Secretary Snow could be as vigilant regarding Chinese mercantilism.

Peter Morici is an economist and professor at the Robert H. Smith School of Business at the University of Maryland. He is a recognized expert on international economics, industrial policy and macroeconomics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission.