Yuan appreciation won't ease US pain
- Source: Global Times
- [05:43 February 09 2010]
- Comments
Will President Obama drop the second shoe of declaring China as a currency manipulating country in the report submitted to congress in April? That carries the risk of further disrupting the already delicate Sino-US relations. Obama has resisted doing this twice during his first year in the White House.
If arms sales to Taiwan and Obama's announced plan to meet the Dalai Lama have touched a raw Chinese nerve, accusation of manipulating currency, followed by more protectionist steps would make matter worse.
On the surface, both sides do not have much room to concede on the currency issue.
The embarrassing defeat of the Democrats in the election of the senator from Massachusetts has sent a clear signal to Obama that the voters do not approve of his performance. Retreating from his ambitious healthcare reform, Obama is investing his political capital in creating jobs and reviving the economy. If the unemployment rate shows no sign of improving soon, the Democrats will see another debacle in the November mid-term election.
When the US economy is mired in recession, finding fault with another fast-growing economy and blocking their development by pressing for currency appreciation is an old ploy the US has been known to use. Germany and Japan have both been victimized in this way.
The exchange rate will be the main Sino-US battlefield in the future.
In his State of the Union address, Obama made it clear that the US will seek new markets aggressively to create more jobs, specifically by doubling exports over the next five years to support 2 million jobs in the US. Blaming China on the currency issue will not necessarily increase US exports, but Obama has to show he is doing something.
Forcing yuan appreciation would deal a heavy blow to China's exports, which are crucial for its job market and overall growth. Since China's landmark currency exchange reform in July 2005, the yuan has appreciated over 15 percent against the US dollar. Given the small profit margin involved in China's exports, appreciation of the yuan would significantly undermine China's export-dependent economy, which is slowly undergoing industrial upgrading. Millions of jobs will be lost in the process.
The free conversion of the Chinese yuan will happen sometime in the future, as that is unavoidable for improving production efficiency and quality. But when the conversion is to be allowed and by what margin of adjustment are issues to be decided by the Chinese authorities. These cannot be done under external pressure.
Forcing yuan appreciation will drag both countries into a costly trade war, and cause unpredictable diplomatic damage. Both sides need to be guided by a broader vision and take constructive steps to prevent conflict from getting out of hand.
Discussion: Yuan appreciation won't ease US pain
