Today, most people forget that the report actually reviews the currency practices of all major U.S. trading partners, not just the Chinese. But China's policy of keeping its currency tightly aligned with the U.S. dollar — combined with its dramatic surge in global trade over the past decade — has made the country a lightening rod in Washington.
By delaying the report until June, however, the Obama Administration is hoping to fend off a bipartisan call for action in Congress led by Senators Lindsey Graham (R-SC) and Chuck Schumer (D-NY). Schumer and Graham have always felt that their saber-rattling strengthens Treasury's hand. I've long felt it has the opposite effect — highlighting the issue in such a public way puts the Chinese in a position of appearing to give in to pressure, and that's something they're loathe to do.
Geithner's delay will certainly provide some breathing space when China's president, Hu Jintao, visits the U.S. for high-level security meetings in two weeks, and also for Secretary Geithner to lead a meeting of the U.S.-China Strategic and Economic Dialogue this spring.
But don't expect the delay to permanently cool heads in Congress. China provides too easy a target for those looking for a scapegoat for bilateral U.S. trade deficits and job losses. Nevermind that China is expected to run an overall trade deficit — Congress will always be more focused on the bilateral relationship.
And no one should be surprised when Treasury again declines to name China as a currency "manipulator" when it does issue the report. The term is nearly absent from the economic literature, and as expressed in the law, it's nearly impossible to prove.
Treasury is charged with consulting with the IMF to "consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade."
In other words, it's not sufficient to identify that a country takes actions to maintain or adjust the value of its currency — many do. The law also requires Treasury to make a judgment as to a nation's intent (to gain an "unfair competitive advantage" in trade), and that's much more difficult to prove. Over the years Treasury officials have consistently noted that a peg or intervention does not in and of itself satisfy the statutory test for "manipulation".
Chinese officials all understand that over time, as the country plays a larger role in global trade and investment, its currency needs to be convertible, with its value determined in competitive foreign exchange markets. While China has a longer time horizon than most members of Congress, in 2005 China did revalue its currency and allowed some limited flexibility before again restoring the peg. I expect China to resume its very limited flexibility policy this year.
In the meantime, Treasury will try to keep temperatures lowered in Washington, and holding off Congress from taking public actions that would make action by China more difficult.
Tony Fratto is a CNBC on-air contributor and most recently served as Deputy Assistant to the President and Deputy Press Secretary for the Bush Administration.