Fine China

Why Congress should be non-plussed about China’s trade surplus.

One of the oldest trade disputes of this very new century has been the seismic imbalance in U.S./Chinese trade relations.  American lawmakers have repeatedly beg/threated/legislated to try and get China to appreciate their currency, believing that the U.S. trade deficit might get reduced if the Chinese took the yuan on a romantic dinner date…or something to that effect.  U.S. legislators have even attempted to essentially fine the Chinese into currency compliance – trying to hike tariffs on Chinese goods as high as 27.5%.

Considering China’s latest trade surplus may exceed $20 billion, Congress may be closer to the mood of reviving Smoot Hawley:

The U.S. House Ways and Means Committee will discuss next week China’s currency policy after Premier Wen Jiabao’s government limited the yuan’s gain to less than 1 percent versus the dollar since a June pledge for greater flexibility. With November elections looming, legislators may push a bill letting companies seek tariffs for compensation for an undervalued yuan…

U.S. lawmakers including Senator Charles Schumer, a New York Democrat, have pressed the Obama administration to demand a speedier appreciation of the yuan. The house committee will discuss whether China has made “material progress” on the issue and what action Congress and the administration may need to take to address the nation’s exchange-rate policy.

While the Adminstration is unlikely to approve any Congressional legislation to gode the Chinese into reassessing their currency – especially after already agreeing to do so this summer - bills threatening a tariff war seems almost certain to be introduced.  Similar measures were taken in 2005 and, like in the summer of 2010, resulted in the Chinese acquising to some American demands for appreciation. 

Legislators might as well rub a lucky rabbit’s foot to ward away the U.S. trade deficit if they believe currency appreciation will significantly impact the situation.  The last time the Chinese appreciated their currency, the U.S. trade deficit…wait for it…grew:

Recent evidence suggests that RMB appreciation will not reduce the U.S. trade deficit and undermines the common political argument for compelling China to revalue. Between July 2005 and July 2008, the RMB appreciated by 21 percent against the dollar-from a value of $.1208 to $.1464.4 During that same period (between the full year 2005 and the full year 2008), the U.S. trade deficit with China increased from $202 to $268 billion.

In addition to the fact that increasing the currency value won’t have any major impact on the U.S. trade deficit, and will only fray trade relations with America’s second largest trading partner (you might be surprised to know Canada is #1), is the reality that China gains nothing by doing so.  With their economy slowing, in part as China encounters the same real estate nightmare the rest of the world has experienced, the Chinese are unlikely to want to also reduce the value of their U.S. debt holdings.  The Chinese are already reducing stimulus efforts and trying to avoid pumping more money into what is potentially becoming the international economy’s next major bubble to burst – China itself.

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