July 22, 2005 in Nation/World

Higher prices likely for goods made in China

Martin Crutsinger Associated Press

WASHINGTON – Attention Kmart and Wal-Mart shoppers: The prices you pay for sneakers, sweat shirts, toys and thousands of other items made in China are likely to be rising soon.

That’s thanks to China’s announcement on Thursday that it is revaluing its currency. Less certain is whether the small revaluation will make a noticeable dent in America’s huge trade deficit with China.

The Bush administration, facing political pressure because of a record $162 billion deficit with China, hailed the announcement as a victory. Officials from President Bush on down have pressed China to stop linking the value of its currency, the yuan, at a fixed rate to the U.S. dollar.

“This is a very positive development. It clearly puts China on the right path,” said Treasury Secretary John Snow.

Federal Reserve Chairman Alan Greenspan called the action a “good start,” while the finance ministers and central bank presidents of the Group of Seven major industrial countries issued a joint statement praising a move they said “will contribute toward global growth and stability.”

But some economists worry that China may have unleashed economic forces that will eventually worsen inflation in the United States by making imports not just from China but all of Asia more expensive for Americans.

The biggest initial impact on consumers may come in toy prices, since about 75 percent of toys sold in the United States come from China.

There also is concern that interest rates will be rising, too, as the Chinese curb the massive purchases of U.S. Treasury bonds they have been making as part of their campaign to keep the yuan fixed in value against the dollar.

Still, most analysts argued that the overall impact on the U.S. and world economies will be extremely positive by trimming America’s huge deficits, which pose a threat to global financial stability.

A rising value of the yuan in relationship to the dollar is expected to eventually stabilize and then begin lowering the U.S. trade deficit and boost the fortunes of beleaguered American manufacturers, who have lost 3 million jobs since mid-2000.

“The winner in all of this will be American businesses and ultimately U.S. workers. It is now more likely that a person working in a U.S. factory today will still be working in that factory five years from now because American products will be more competitive,” said Mark Zandi, chief economist at Economy.com, a forecasting firm.

In its announcement, China said it would revalue its currency so that it will take 8.11 yuan to purchase one dollar instead of the 8.277 yuan it has taken over the past decade. That had the immediate effect of revaluing the yuan by 2.1 percent.

China also said it would switch from linking the yuan to the dollar and instead link it to a marketbasket of unspecified currencies. Beginning Friday, the yuan will be allowed to change in value within a 0.3 percent band each day.

An undervalued yuan has made Chinese products cheaper in U.S. markets and American products more expensive in China. American companies contend the yuan is undervalued by as much as 40 percent against the dollar. U.S. automakers estimate a mid-size American-made car costs Chinese consumers $2,000 more because of the undervalued currency.

Administration officials say that as American products become cheaper in China, U.S. exports will rise and rising prices for Chinese goods will cause Americans to eventually curb their own purchases. Another significant boost will come when other Asian countries such as Japan, South Korea, Taiwan and Malaysia allow their currencies to rise against the dollar, no longer fearful of losing competitive ground to China.

The dollar’s value, which has fallen by about 17 percent against major currencies – mostly in Europe – over the past three years, will probably decline by an additional 15 percent over the next three years with the biggest declines being against Asian currencies, analysts predicted.

U.S. Treasury bonds fell sharply in response to China’s revaluation on Thursday as investors feared the inflationary effects of the change on the economy and also worried about China’s future appetite for U.S. bonds. But many analysts said the markets were overreacting to the prospect of changes that will come only gradually.

Some forecasters predicted that China will allow its currency to rise in value only by about 5 percent this year and another 5 percent in 2006, fearing that anything more dramatic would undercut Chinese exports too much.

“They are going to control this thing with a very tight fist,” said Nariman Behravesh, chief economist at Global Insight.

Sen. Charles Schumer, prime sponsor of legislation that would impose across-the-board tariffs of 27.5 percent on all Chinese goods, said he would still seek a vote on his bill in October if China has not moved enough by then.

“China has put the key in the ignition but now they have to step on the gas,” Schumer, D-N.Y., said in an interview.

© Copyright 2005 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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