The pesky problem of China's undervalued currency just won't seem to go away.
Even after Beijing agreed to a gradual appreciation of the yuan in 2005, China's current account surplus has surged to record levels, fueling speculation that the currency needs to appreciate even further.
But when Chinese officials visit Washington later this month in the second meeting of the "Strategic Economic Dialogue" between the two countries, the Bush administration is not expected to push for a major revaluation of the yuan. Instead, the talks will focus primarily on longer-term issues, such as tourism, energy and the environment, intellectual property rights and reducing the U.S.' trade deficit with China.
"China needs to do more on the currency [issue] for a lot of reasons," Treasury Secretary Henry Paulson said in a speech at the Peterson Institute for International Economics. "But I think to get to the trade balance, we're going to have to get to some other things and it's those kinds of things we're focused on--though we're always focused on the currency--to a large extent in the SED."
"I don't believe that there's much China could do with the currency that would make a difference in the trade balance," he adds. According to Paulson, if Beijing works to establish competitive and efficient capital markets, this will then lay the groundwork for a currency that is in fact market determined.
It probably is a good idea to let the spat over the exchange rate cool for a while. For at least the past five years, the dispute over China's exchange rate has been a sore subject for many U.S. policymakers who have argued that the cheap yuan has caused a flood of imports into the U.S. and E.U., and displaced millions of jobs, particularly in the manufacturing sector.
One of the first rules in diplomacy--economic or otherwise--is to do no harm. At the moment, it doesn't appear that the dollar-yuan exchange rate is having an enormously harmful effect on the broad U.S. economy. The administration has recently levied several complaints against China at the World Trade Organization for its trade policies, and it has slapped anti-subsidy tariffs on some Chinese goods. For now, this seems to be the best approach to dealing with, rather than meddling with, its currency.
