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.
Since the People's Bank of China announced that it would allow the yuan to "float" within a specific range on June 19, it has appreciated less than 1 percent against the dollar, the currency to which it had been pegged for nearly two years. This has angered members of Congress, even though part of the bank's announcement also said that Beijing would still tightly manage the exchange rate, and despite other indications that appreciation would take place slowly. Already, members of the House are planning to debate legislation labeling China as a "currency manipulator" in order to pave the way for trade sanctions, and have scheduled a September hearing on the matter.