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Could tariffs force China to play fair with its currency?

WASHINGTON — With President Barack Obama unable to force China to play fair with its currency, a congressional committee Friday moved to give him a new weapon — the power to use currency manipulation to justify tariffs on Chinese goods.

The ultimate goal is to force China to let the value of its currency, the yuan, float freely. Experts say that would put U.S. exports on an even playing field, make Chinese exports more expensive, make U.S. exports to China less expensive, and help create 500,000 jobs.

Moreover, a free-floating Chinese currency is key to a rebalancing a changing global economy as envisioned by the G-20 group of top economic powers, according to C. Fred Bergsten, the director of the Peterson Institute for International Economics.

However, Obama, like his predecessor, thus far has had little luck or leverage in persuading China to stop undervaluing the yuan, a practice China resumed in 2008 after a three-year hiatus.

He spent most of a two-hour meeting on the sidelines of the United Nations in New York Thursday trying to convince Chinese Premier Wen Jiabao to let the currency float. He was unsuccessful.

"Ultimately, they don't have any leverage," said Lloyd Wood, a spokesman for the American Manufacturing Trade Action Coalition, which represents small U.S. manufacturers that don't produce in China.

First, some economists fear a trade war if the U.S. gets too tough.

In an interview with McClatchy on Thursday, liberal economist Robert Reich, a Clinton-era labor secretary, warned that an anemic economic recovery and widening U.S. income inequality could lead to policies that bring "another era of Smoot-Hawley."

During the Great Depression, the Smoot-Hawley tariff act of 1930 hit some 20,000 imported goods with record tariffs in an attempt to protect American farmers and manufacturers. It helped trigger a global trade war that economic historians think worsened and prolonged the Great Depression.

Second, others think the Obama administration fears a Chinese selloff of U.S. government bonds.

Earlier this month, members of Congress ripped Treasury Secretary Timothy Geithner for not playing hardball with China, accusing the administration of being afraid to anger a country that helps finance U.S. government debt.

"You know the United States is put at a terrible disadvantage, and you refuse to act. What are you afraid of?" Sen. Charles Schumer, D-N.Y., told Geithner. "Are you afraid that if you cite the Chinese, they will respond by selling some of the trillions of dollars of Treasuries that they currently hold? By doing that, they'd be cutting off their nose to spite their face."


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