Earlier this week, the American Enterprise Institute (AEI) held a conference that asked “Is China Taking Unfair Advantage of Its Trade Partners?”  AAM Executive Director Scott Paul was among the panelists and, as Inside U.S. Trade noted, he had some ready answers to the question of how the U.S. should handle China.

With both the EU and Japan joining U.S. calls for Beijing to revalue its artificially depreciated currency, it’s clear that something has to give regarding China’s unprecedented current account surplus.  The issue, though, is whether dialogue will push the Chinese to revalue, or whether concerted unilateral action must be taken.  It’s suggested that China would benefit from a more flexible exchange rate in order to lower potential inflation at home, but so far the Chinese regime has made only token adjustments.

It’s important to note that China foreswore currency manipulation when entering the WTO in 2001.  But not until 2005 did it even begin to budge its currency, the Yuan, by any token increments.  Most economists consider the currency still undervalued by as much as 40%, a helpful, continuing boost for its exports.

The June 2 panel discussion at AEI offered some diverse approaches to the currency issue, with several panelists favoring ongoing discussions, such as the upcoming semi-annual ‘Strategic Economic Dialogue’ (SED), to push for a resolution of the currency issue.  AAM’s Scott Paul suggested that enforcement of U.S. laws to press China on its commitments could also be a sensible and fair step. There was a definite consensus among the panelists, though, that the currency is pegged and should be revalued, which would be of benefit to both China and the U.S. in the long run.

China has been pegging its currency to the dollar since 1994.  In those intervening 14 years, Chinese exports to the U.S. have jumped from $39 billion annually to $321 billion, a stunning increase, something the panelists were quick to note.

The issue needs resolution, and soon.  Dropping trade barriers such as currency manipulation would be a useful gesture to enhance the free market.  Scott Paul suggests that a currency revaluation agreement similar to the 1985 Plaza Accords could be a good start—something interesting to aim for, rather than just another round of dialogue at the SED.
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This entry was posted on Wednesday, June 4th, 2008 at 7:19 pm and is filed under Holding China Accountable, Currency Manipulation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.