Freedom for China's Currency

The Senate shot a firecracker over Beijing last week. It voted 67-33 in favor of the US threatening China with a 27.5 percent tariff on its imports into the US if it didn't unfreeze its currency, the yuan.

China has long maintained a fixed exchange rate between the yuan and the dollar, providing an indirect subsidy to help maintain its high-growth economy. Such currency control gives Chinese exports a 15 percent to 40 percent price advantage on global markets. That antimarket policy also discourages exports of American goods and services to China.

Letting the yuan "float" in global currency markets, however, would help level the competitive playing field between Chinese and American companies. But China refuses to do that, claiming that parts of its economy, such as banks, are still too weak to bear the pressure of global competition that a floating yuan would bring.

Recent jawboning of Beijing by the Bush administration so far has failed to budge China. Meanwhile, many US manufacturers are increasingly frustrated at the impact on their businesses.

US jobs in such industries as textiles are being cut due to a rising tide of Chinese imports, while potential jobs in such export industries as steel aren't being created because the currency rate doesn't favor sales to China.

The Senate's proposed 27.5 percent tariff would help balance out this skewed trade. In the House, meanwhile, free-trade forces are threatening similar action. California Republican Duncan Hunter, the powerful chairman of the armed services committee, has cosponsored a bill with Ohio Democrat Tim Ryan to define currency manipulation by a foreign government as an export subsidy. That would allow retaliatory trade action.

That concept might be difficult to defend if China ever takes the issue to the World Trade Organization. But it's worth testing since so many governments protect their home industries through tight exchange-rate controls.

Stable exchange rates are essential for any economy to prosper. And when market pressure pushes a currency's value up or down quickly, governments should intervene temporarily to ease the transition for businesses. But a fixed rate over many years, especially in a country like China that's huge and growing, distorts trade in today's global markets.

US patience with China is growing thin. The strong vote in the Senate reflects a wide sentiment that China must embrace open markets even further. If it wants to become a great power, it must start acting like one.