Treasury Secretary-designate Timothy Geithner says President Barack Obama believes China is "manipulating" its currency, a declaration that American manufacturers have long sought in their efforts to combat America's soaring trade deficit with China.
However, Geithner also suggested that now might not be the right time to brand China as a currency manipulator under U.S. trade law, a designation that would trigger negotiations between the two countries and could result in U.S. economic sanctions against China.
"President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency," Geithner wrote in answer to questions submitted to him by members of the Senate Finance Committee.
"President Obama has pledged as president to use aggressively all the diplomatic avenues open to him to seek change in China's currency," Geithner said.
He noted that while in the Senate, Obama sponsored legislation along with other senators that would overhaul the process for determining what countries are manipulating their currency to gain trade advantages in competition with the United States. That legislation would have authorized a new enforcement process "so countries like China cannot continue to get a free pass for undermining fair trade principles," Geithner said.
Geithner's comments raise the possibility that the Obama administration will take a tougher line with China than former President George W. Bush did. The previous administration refused to cite China as a currency manipulator in a report that Congress requires the Treasury Department to prepare twice a year.
Instead, former Treasury Secretary Henry Paulson insisted that the best way to get China to revalue its currency was through diplomatic engagement. Paulson began the Strategic Economic Dialogue, high-level discussions that have been held twice a year starting in late 2006.
During this process, China did allow the value of its currency to rise by 21 percent. But American manufacturers say that the Chinese yuan is still significantly undervalued, making Chinese goods cheaper for U.S. consumers and American products more expensive in China.
If Paulson had labeled China as a currency manipulator, that designation would have launched negotiations between the two countries and if that process had failed, the United States could have imposed trade sanctions on Chinese imports.
While Geithner did state that Obama believes China is manipulating its currency, he said the new administration would consider a number of factors in deciding how to proceed.
"The question is how and when to broach the subject in order to do more good than harm," Geithner wrote. "The new economic team will force an integrated strategy on how best to achieve currency realignment in the current economic environment."
In response to another question on China's currency, Geithner noted that China's economy is slowing at present as a result of the global downturn which has cut into China's ability to export.
"Because China accounts for such a large fraction of the world economy, a further slowdown in China would lead to a substantial fall in world growth and demand for U.S. exports and delay recovery from the crisis," Geithner said. "Therefore, the immediate goal should be for us to convince China to adopt a more aggressive stimulus package as we do our part to try to pass a stimulus package here at home."
Under U.S. trade law, the first currency report that the new administration must submit to Congress will be due in April although past administrations have often missed the deadlines.
Frank Vargo, vice president for international affairs at the National Association of Manufacturers, said Friday that the new administration's acknowledgement that China was engaging in currency manipulation represented an important change but that it needed to be followed with actions that will get China to resume allowing its currency to rise in value.
Vargo said China's currency appreciation came to a halt last summer as China became more worried about what a slowing world economy was doing to its exports.
"The National Association of Manufacturers has long thought it was necessary for the U.S. government to tell the Chinese government that we know they are manipulating their currency. The previous administration always dodged that," Vargo said. "Until you acknowledge the problem, you can't go ahead and get a good solution."
In response to another question on China, Geithner did not commit specifically to continuing the current Strategic Economic Dialogue talks but he said the administration wanted a "deep engagement" with China.
Geithner's nomination to be treasury secretary was approved by the Finance Committee on an 18-5 vote on Thursday despite unhappiness on the part of many senators over mistakes Geithner made on his tax returns earlier in the decade.
The full Senate is expected to take up Geithner's nomination on Monday and he is expected to win approval at that time with supporters saying that the current economic crisis requires quick approval of someone with Geithner's qualifications.
Geithner is currently head of the New York Federal Reserve Bank. In that post, he was a key participant in the financial rescue decisions made by the Bush administration and Federal Reserve Chairman Ben Bernanke.