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U.S. Takes Aim at Yuan

Author: Christopher Alessi
October 12, 2011

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The U.S. Senate passed legislation on Tuesday that would tax the goods of countries with "misaligned" currencies (WSJ). The bipartisan measure is meant to target China, a trading partner the United States has routinely criticized for devaluing its currency. China warned that such a move could instigate a trade war (BBC) between the two nations, threatening the global economy.

U.S. officials have argued that by artificially holding down the yuan, China is keeping its exports inexpensive for U.S. consumers, thus undermining the U.S. manufacturing sector. The measure has gained traction because of the perception that China's alleged unfair trade advantage (NYT) is costing U.S. jobs and contributing to an already-bleak employment outlook.

Leaders in the House of Representatives have voiced opposition (Politico) to the bill, indicating the measure is unlikely to be taken up in the lower chamber. The White House has not taken an official stance on the bill, but cautioned that it could be inconsistent with World Trade Organization rules.

Still, the measure is "very significant" from a symbolic point of view, explains CFR senior fellow Edward Alden, who says the Senate's action gives voice to growing U.S. frustration over China's currency and trade policies. Indeed, the United States posted a trade deficit of $273.1 billion (Guardian) with China last year. U.S. critics contend the yuan is undervalued by as much as 40 percent. Officials in Beijing argue that U.S. economic policy is to blame for the imbalance, noting that the yuan has appreciated (Bloomberg) by 25 percent since China removed its peg to the dollar in 2005.

A recent study (PDF) examining the effects of Chinese competition on local U.S. labor markets between 1990 and 2007 found regions with the greatest exposure to Chinese imports saw manufacturing employment decline by one-third more than regions with limited exposure.

The authors concluded that higher exposure to China also led to larger increases in unemployment and other government benefits, making the overall U.S. economy less efficient and competitive. While one of the authors, Gordon Hanson of the University of California at San Diego, thinks the gross impact (CSM) of trade with China is positive, he says the research demonstrates "just how bad conditions are for low-skilled workers in the U.S."

However, CFR's Alden says that if the Senate bill became law, the United States would likely be subject to retaliatory measures from China, the largest holder of U.S. debt. Beijing has already warned that in addition to sparking a trade war, unilateral action by the United States could undermine bilateral relations (Bloomberg) on other fronts, including cooperation on dismantling North Korea's nuclear weapons program.

Advocates of the legislation, including Senator Charles Schumer (D-NY), argue that it would force China to allow its currency to appreciate significantly faster, creating more than two million U.S. jobs (Politico). Opponents, like House Speaker John Boehner (R-OH), say the legislation is "dangerous" and predict an inevitable trade fallout with Beijing.

Analysts tend to agree the bill would not do much to advance U.S. economic interests--or U.S. ties with China. It could "prompt China to slow or stop yuan appreciation to make a strong political statement that it will not be bullied--particularly not by a government that doesn't have its economic house in order," writes Dan Ikenson in Forbes.

Writing for Citywire, Chris Marshall notes that "restrictions against China could backfire directly on the U.S. economy." He cites ING economists who estimate that "retaliatory threats" from China could hit U.S. treasuries and destabilize global equity markets, shaking the confidence of an already-fragile global economy.

Background Materials

"Tallying the Toll of U.S.-China Trade," Wall Street Journal

"How Should the United States Address Chinese Trade Imbalance?" CFR Meeting

"Confronting the China-U.S. Economic Imbalance," CFR Backgrounder

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