As two Democratic Senators return from a week-long trip in China, they remain disturbingly un-averse to draconian trade legislation. Despite having met with many high-level officials concerning a revaluation of China's currency, the renminbi, Senators Charles Schumer and Lindsey Graham have not yet decided if they will force a vote this Friday.
Though the bill will likely never become law due to strong Republican House leadership, the threat levying 27.5 percent tariffs on China should its government fail to move towards a floating currency runs the risk of further souring U.S.-China relations.
China underwent its first revaluation of the renminbi last July, allowing the currency to appreciate 2.1 percent against its pegged rate to the U.S. dollar. Since then, however, there has only been a gradual move upward, less than one percent.
China has never indicated that the transition from a pegged to a floating exchange rate would be quick. Despite this, there has been continued pressure for a rapid transition from a variety of U.S. officials, ranging from Treasury Secretary John Snow to Senators Schumer and Graham.
The U.S. accusations against China primarily hinge on the fact that the renminbi has been kept artificially low, which has allowed for significant export growth in China at the expense of other western countries - and the burgeoning U.S. current account deficit. A lower value of the renminbi means that American consumers can receive more renminbi per dollar; thus goods become cheaper.
Though China does represent nearly 28 percent of the U.S.'s current $726 billion dollar deficit, China is by no means the only problem. Other significant factors include the paltry domestic savings level, which creates a reliance on global savings, as well as relatively inelastic demand for imports. Both of these have been brushed under the carpet in search of a Chinese scapegoat.
China, however, is in need of currency reform. A floating exchange rate is more conducive to capital flow, and will allow the economy to continue to grow as it can benefit from increased international capital. In addition, it will ease tensions with many of China's major trading partners in Europe and North America, and textile and other trade wars will not erupt so flagrantly.
The Chinese government is in the process of establishing this reform, however, and it has been making continued efforts over the last year to integrate itself more fully into the international financial framework. The development of a market-maker system - in which banks can trade amongst themselves instead of through the government - has allowed for greatly improved liquidity, as well as increased volatility.
The government has permitted use of forward contracts, as well as other derivatives such as swaps. These financial instruments allow businesses to hedge currency risk and reduce the uncertainty and financial risk associated with doing business with China.
After spending a week in China, it is disheartening that these senators have failed to see the progress China has made. It serves little purpose to threaten a country in the process of reform with exorbitant tariffs. While they claim they will take into consideration the forthcoming visit of Chinese President Hu Jintao to the United States in April, even vocalizing threats risks damaging relations with China.
China plays an integral role in the global economy, and it must not be treated as an inferior partner. While the United States must continue to support and help foster financial reform, hollow threats are counterproductive, and officials should be reaching for carrots, not sticks.
