China and The Yuan - Unfair Trade

Well, it's official now. The United States of America has been warned, by China, that any bill passed by the United States requiring fair valuation of foreign currencies would have "repercussions." I'm shaking.

With the U.S. in it's worst financial shape since the Great Depression, and the Yuan, the official currency of China, being deliberately set at a low rate of exchange, thus giving the Chinese a sharp financial edge in world trade, the stage is set for the United States to experience a continued fall in the value of the dollar against the Euro. This comes at the same time that the Chinese Yuan remains somewhat "static", that is, a bit more immune to the world wide economic crisis now facing us all.

On Monday, the Senate voted to debate a bill that would permit the government to impose new duties, or tariffs, on imported goods manufactured in countries which undervalue their currencies. China is the leader in this type of behavoir, and so has the most at stake should the bill actually come to pass. Undervaluing currencies is akin to providing a government subsidy to the private market place in those countries, which effectively gives them an artificial edge in foreign trade. It's one of the main reasons Americans have been buying Chinese goods for over 25 years now. It is also one of the chief reasons so many of our jobs have gone overseas, further fueling a recession brought on by our own internal financial maneuvering.

If you think that this proposed bill, which hasn't even got a name yet, doesn't scare China, think again. By Tuesday the Chinese Foreign Ministry, the Commerce Ministry and Central Bank had all issued statements denouncing the proposed debate concerning the bill. So, we must be on the right track.

But don't get your hopes up just yet, as this may be mere saber rattling on the part of the Obama administration as we ramp up to Election Year 2012. The Chinese currency issue has been the "elephant in the living room" for sometime now, with this proposed debate being the first action undertaken by any administration, Republican or Democrat, in over 20 years, to tackle this issue.

Foreign Ministry spokesman Ma Zhaoxu states that this move toward "protectionism" on the part of the United States violates World Trade Organization rules and may seriously disturb trade relations between our two nations. He also underscored the fact that China has increased the value of the Yuan by about 7% in comparison to the dollar since June of 2010. In addition, he stated that the undervaluing of the Yuan is not the cause of the United States current trade deficit with China. Well, if it's not, I'd like him to tell me what is?

Ma further stated that China is the fastest growing export market for the United States, and that trade is important to both sides. And that is exactly the point of the Senate debates to which he is so strongly opposed. His statement read, in part, "The Chinese side appeals to the U.S. side to abandon protectionism and not to politicize trade and economic issues, so as to create a favorable environment for the development of China-U.S. economic and trade ties."

Please explain to me how China's current under valuation of the Yuan, with it's attendant domination of imports into the United States, while severely restricting U.S. imports to China is supposed to create a "favorable environment" for anyone else but the Chinese.

This legislation, if it ever gets past the debate stage, would have the effect of creating more jobs here in the United States as the Chinese imports become less of a bargain. Without government subsidies the Chinese corporations will face the same obstacles as American companies do, thus leveling the playing field. This is the real fear evoked by the protests of the Chinese government.

The Chinese Central Bank warned, ominously, that the proposed law could cause more serious problems. If the bill passes, they state that it "cannot resolve insufficient saving, the high trade deficit and the high unemployment rate in the U.S., and it may seriously affect the progress of China's exchange rate reform and may lead to a trade war, which we do not want to see."

Of course they don't want to see a trade war with the United States. With the Chinese buying almost nothing from us, and us threatening to stop the allure of the undervalued imports from China, they would be hard pressed to collect on all of the money we owe them. Or, worse yet, we could stop all Chinese imports, jump start our own economy with the new jobs created by that action, and use the tax revenue to pay down our debt to the Chinese. After that, their largest import market would be a thing of the past.

While China's Commerce Ministry spokesman Shen Danyang has said that China has begun taking steps that would increase U.S. imports to China, it may be a case of too little, too late.