For the past several years, China has pegged its currency, the Yuan, to the U.S. dollar in order to maintain a ratio that makes Chinese goods cheaper than American goods. Rather than letting their currency float freely in world currency markets, the Chinese government keeps their currency undervalued by as much as 40 percent, according to some currency experts. China has much stricter currency controls than some countries, allowing them to maintain the Yuan against the dollar by buying or selling dollars in the market. This process continues until the targeted value of the Yuan is achieved. This process is known as "managing the float."

The result of this practice is a growth in Chinese exports to the United States from $62 billion in 1997 to more than $125 billion in 2002. This result is possible because of the combination of China's unlimited supply of extremely low-wage workers and the manipulation of the Yuan in relation to the dollar. During this same period of time, U.S. exports to China have increased from $13 billion to only $19 billion.

Industry associations and individual companies are beginning to complain to the Bush administration about the growing problem associated with the disparity in currencies. The manipulated value of the Yuan makes China's exports cheaper than they might otherwise be and this puts increased economic pressures on producers in countries with higher currency values. Phil Tredway, an American business owner, says, "We can compete against China's low labor costs, and we can compete with them if they play by the rules. But we cannot compete with them if they have a 20 percent to 40 percent currency advantage."

Administration officials respond by noting that China is one of only a few in the world economy that is still running at full speed. They say putting the breaks on Chinese exports could create as many problems as it solves. These same officials also realize that if the Yuan rises in relation to the dollar, American consumers will experience price increases on everything from clothing to electronics and other household appliances.

The Bush administration is expected to approach this issue more cautiously than most manufacturers would prefer. The message will be simply that more flexibility in exchange rates would be in China's best interest, but that message is expected to be delivered very diplomatically.

(Updated October 1, 2003)