Tough Talk On China

By Adam Zagorin

The Bush Administration sounded the alarm last week against what it says is a growing threat to the U.S. economy: the value of China's currency. For 10 years, Beijing has fixed the value of the yuan at 8.28 to the dollar. But as the value of the dollar has fallen, complaints from U.S. manufacturers have grown louder that if the yuan were allowed to rise to its true value, Chinese imports wouldn't be so cheap, compared with U.S.- made products. "The situation right now with China's currency," Treasury Secretary John Snow told TIME, "is risky and unsustainable."

And he is backing up the tough talk. Within the past 10 days, the U.S. has twice imposed limits on apparel imports from China, and Congress is considering a 27.5% tariff on all Chinese imports. Those shipments were up 54% in the first quarter over the same period last year, after the Jan. 1 removal of quotas on textile imports--an event for which the U.S. had a decade to prepare.

Of course, it isn't just China's undervalued currency that makes its TVs and T shirts so irresistibly cheap to American shoppers. It's the low wages paid to the people who produce them. U.S. policymakers acknowledge that the wage differential won't be erased by a small rise in the yuan's value (say 5%), and they recognize that the Chinese are unlikely to go along with a more consequential one (say 25%). But the Administration feels some heat needs to be put on China to ward off protectionist measures in Congress. Indeed, Alan Greenspan pointed out last week that revaluing the yuan won't help the trade imbalance because U.S.-made products will still cost more than those from China, Thailand and Malaysia. "We will be importing the same goods," he said. China responded to the pressure late last week by announcing it will hike its export taxes-- in many cases by 400%--on 74 textile categories. --By Adam Zagorin. With reporting by Elaine Shannon

With reporting by Elaine Shannon