US-China Relations:The Yuan

Post by Ivan Kirov, Great Decisions student

Background: China's Yuan is pegged to the American dollar. This keeps its currency artificially devalued)

The Economist recently published an article (America and the Yuan: The Truth Hurts) that further elaborates on the speculation that the Treasury Department will call China a currency manipulator in its biannual report. The arguments for and against are fairly clear. On the one hand, the hope is that having the Treasury openly condemn the undervalued Yuan will pressure the Chinese to revalue just as tariffs in 2005 led to rapid Chinese revaluation. On the other hand, there is not much that the American government can practically do to alter China's currency stance -- and there is no need to tempt fate by risking an all-out trade war. After all, the Administration has already been negligent enough on the trade front with the tire tariff and the non-opposition to the infamous 'Buy American' provisions in the 2008 stimulus package.

This new article adds a rather powerful argument in favor of branding China a manipulator -- it would forestall preemptive and aggressive Congressional action. The last thing either side wants is a currency or trade war, and that is precisely what would happen should Senators Schumer and Graham succeed in forcing the government to seek redress against China in the IMF, WTO, and through unilateral tariffs. The hope, the article notes, is that by putting China on its manipulator list the administration can pull the rug out from under those calling for more extreme measures.

Some of the poison and vitriol may have been drawn out of the issue after China's recent statements toward a more market-based currency regime. Perhaps China will finally start to dismantle the Great Wall of Yuan that helps keep the global economy from rebalancing away from the dramatic paired surplus-deficit axes of the past.