Washington, DC, Dec. 15--Federal Reserve Chairman Alan Greenspan said Thursday that a rise in the value of China's currency against the dollar probably would have little impact on America's soaring trade deficit or the loss of U.S. manufacturing jobs.
Greenspan's comments were at odds with American manufacturing companies, which contend that China's currency is undervalued by as much as 40 percent against the dollar and this has given Chinese products an enormous price advantage against American goods. They say that has contributed to record trade deficits with China and the loss of thousands of U.S. jobs.
The Bush administration, facing Democratic criticism over the soaring trade deficit and a loss of 2.8 million U.S. manufacturing jobs since July 2000, has taken up the currency issue with Chinese leaders. Both Treasury Secretary John Snow and President Bush have urged China to stop the practice of linking the value of the Chinese currency to the U.S. dollar at a fixed rate.
But Greenspan, in a speech to the World Affairs Council of Greater Dallas, called the belief that U.S. jobs could be created with a stronger Chinese currency "conventional wisdom" that oversimplified the economic issues involved.
Greenspan said that if China did allow the value of its currency to float and the currency rose in value, as U.S. manufacturers expect, it might cut Chinese exports of such goods as textiles to the United States. But he said rather than boosting production of textiles in the United States, it was "far more likely" that U.S. imports from other low-wage countries in Asia would simply replace the Chinese textiles.
He said the rise in the value of China's currency "would be unlikely to have much, if any, effect on aggregate employment in the United States."
However, Frank Vargo, vice president for international affairs at the National Association of Manufacturers, said that American manufacturers were convinced that a stronger Chinese currency would help narrow the U.S. trade deficit and save manufacturing jobs.
"Everybody knows that China's currency is undervalued, and it is having a definite impact on American manufacturing," Vargo said.
In his speech, Greenspan said there was a concern that the massive amounts of money China was spending to control the value of its currency threatened to ignite a serious bout of inflation in that country, given that its money supply was rising by more than 20 percent this year.
Greenspan used the address to elaborate on warnings he issued last month about the damage that could be inflicted on the U.S. economy from new barriers to protect domestic industries against foreign competition.
