Greenspan Warns Against Anti-China Protectionism

WASHINGTON – Federal Reserve (search) Chairman Alan Greenspan (search) on Thursday warned U.S. lawmakers not to turn to protectionist measures to deal with global trade tensions, and said a possible revamp of the Chinese currency system came with no guarantee it would protect U.S. jobs.

In prepared testimony for delivery to the Senate Finance Committee (search), Greenspan said stiffer duties on Chinese imports would simply shift the source of U.S. imports to other low-cost suppliers.

"A policy to dismantle the global trading system, in a misguided effort to protect jobs from competition, would redound to the eventual detriment of all U.S. job-seekers, as well as millions of American consumers," he said.

Greenspan said some "mistakenly believe" that a marked increase in the value of the Chinese currency, the yuan, relative to the U.S. dollar "would significantly increase manufacturing activity and jobs in the United States.

"I am aware of no credible evidence that supports such a conclusion," he said.

The United States' trade deficit swelled to a record $617.6 billion last year, including a $161.9 billion deficit just with China, the highest ever with a single country.

For two years, the Bush administration has been prodding China to stop linking its currency, the yuan, to the U.S. dollar, and instead move to a more flexible currency system.

Some lawmakers in Congress want to impose hefty tariffs on Chinese goods flowing into the United States if Beijing doesn't move to a more flexible currency system.

Greenspan said such tariffs, if implemented, would lower imports from China but would also raise imports from other "low-cost" sources of supply in other countries.

"U.S. imports of textiles ... assembled computers, toys and similar products would in part shift from China as the final assembler to other emerging-market economies in Asia and perhaps in Latin America, as well," Greenspan said. "Few, if any, American jobs would be protected."

Facing criticism from Democratic and Republican lawmakers, manufacturers and others for not being tough enough on the Chinese, the administration has intensified its efforts.

Over the last month, the administration has announced new limits on the amount of clothing that China can ship to the United States. It has threatened to brand China a currency manipulator unless it changes its policies. And the government has appointed a special envoy to work with China on these issues.

The Bush administration, however, has refused to bring a trade case against China over its currency practices, something that is vexing to critics.

American manufacturers contend that China's system is hurting U.S. exports and contributing to losses of U.S. jobs. Manufacturers believe the yuan is undervalued by as much as 40 percent. The weaker yuan makes Chinese goods cheaper in the United States and American products more expensive in China.

Greenspan said that at some point China will let the yuan rise against the U.S. dollar because its current system represents an increasing threat — including inflation — to the Chinese economy.

In pushing China to make a change, the administration has laid out a similar case.

Reuters and the Associated Press contributed to this report.