U.S. Treasury Secretary John Snow on Tuesday pledged a renewed drive to get countries such as China to adopt flexible currency rates in order to rein in the swelling U.S. trade deficit. The Group of Seven industrial countries -- which will meet in Washington on Oct. 1 -- and China accepted the need to let market forces set exchange rates, Snow said in prepared remarks to the Economic Club of New York. "It's critically important to keep this issue on the forefront of international economic policy, so the adjustment process that flexible exchange rates make possible can continue and can be encouraged and nurtured," Snow said. He spoke hours after the Commerce Department reported that the U.S. current account deficit, which measures flows of goods, services and investment income, widened to a record $166.18 billion in the second quarter. Many economists believe that, if the deficit continues to widen, the dollar will have to fall or U.S. interest rates will need to rise to keep attracting foreign capital to plug the gap. "We cannot continue to have artificially set rates developing exaggerated imbalances in the world economy," Snow said. The G7 comprises the United States, Britain, Canada, France, Germany, Italy and Japan. China has been invited to participate in part of the group's forthcoming meeting in an effort to draw Beijing into talks on global issues in recognition of its growing economic clout. It is now the world's seventh-largest economy.
EDGY ABOUT CHINA
China's refusal to unshackle its currency, the yuan, from a peg of 8.28 per dollar that it instituted in 1995 has set American industry's nerves on edge. U.S. firms say the rate is too low, giving imported Chinese goods an unfair price advantage. Snow said the Bush administration had found wide acceptance for its stance in favor of market-based exchange rates and free trade. "We've also taken this message to China and they have agreed," Snow added. China has a long-stated goal of allowing the yuan to move more freely but says it will not do so until the time is ripe because the lesson from Asia's 1997/98 financial crisis is that financial market liberalisation must be carefully prepared. During a question-and-answer session, Snow said the U.S. trade deficit with China was too large. "I don't think it's sustainable," he said. Washington last Friday reported an overall trade deficit for July of $50.15 billion, the second-largest monthly shortfall ever, including a deficit of $14.9 billion with China. For the first seven months of 2004, the United States ran a deficit of $83.4 billion with China, an increase of $18 billion -- more than a quarter -- from the same period last year.
"That's why we're pressing the Chinese continuously for more market openings, to stop ripping off our ideas with their fraud on intellectual property -- and that's what it is, to call a spade a spade," Snow said. Chinese officials say the bilateral deficit is inflated because many Asian countries, such as South Korea and Taiwan, now assemble goods in China that they previously exported directly to the United States. Still, the argument that the yuan is held unfairly low has resonance during a U.S. presidential election campaign in which opposition Democrats say U.S. jobs are vanishing overseas. Snow described the global economy as being in better shape now than it had been in a long time and said U.S. policies deserved credit for fostering prosperity. "That said, the rest of the world is still growing too slowly," Snow said, adding, "the trade deficit is largely a result of the global growth deficit." He said the U.S. economy, with the help of the Bush administration's tax cuts, was on solid ground after a period of weakness in 2000 and 2001 that was made worse by the Sept. 11, 2001, attacks. "We are beyond recovery," Snow said, "We are experiencing solid economic growth." He acknowledged that U.S. budget deficits were too big and were unwelcome, but he said the key to shrinking the shortfall between spending and income was faster growth.///