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U.S. Needs Patience, not Threats, to Address China Currency Appreciation

Tuesday, Aug. 10, 2010

Few pages in the American political playbook have proven more resilient over the last decade than blaming China's undervalued currency, the yuan, when the U.S. economy sags. When Beijing announced last month that it was unpegging its currency from the dollar and implementing a more flexible exchange rate system, it came after more than a year's worth of constant but unsuccessful pestering from Congress and the Obama administration. Now, with more than a month of this new "flexible" regime in the books, American politicians are unimpressed with the yuan's paltry appreciation against the dollar, and are once again calling for trade sanctions against China. But two examples from the recent past reveal that patience outperforms bluster when it comes to addressing Beijing's currency policy.

The notion that Beijing keeps its currency undervalued became a politically salient issue in the U.S. during the early 2000s. Then, as now, the basic argument was the same: The artificially weak yuan acts as a trade subsidy for Chinese goods, making them more competitive in the American and global market. With the U.S. hemorrhaging manufacturing jobs, China's currency became an easy target for politicians eager to give constituents someone or something to blame. Additionally, American politicians have argued that this monetary distortion results in significant global imbalances. Countries like the U.S. run huge trade deficits, while export-led economies like China run huge trade surpluses and then loan the resulting cash reserves back to deficit economies. ...

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