From The Foreign Affairs:
Summary: Politicians in Washington are clamoring for currency revaluation in China to reverse China’s trade surplus with the United States. But the trade imbalance is not the threat they make it out to be, and a stronger yuan is not the solution. Everybody should focus instead on properly integrating China into the global economy.
China’s economy has grown dramatically in the last decade: it is more than twice as large as it was ten years ago. This spectacular rise means that Beijing can influence the global economy today in ways that would have been unimaginable in the 1990s — a development that has led to widespread concerns in the United States. Many officials in Washington and small U.S. manufacturing companies allege that Beijing has deliberately undervalued its currency and manipulated markets in order to promote the growth of its exports.
Consequently, many U.S. politicians are clamoring for action to redress China’s growing annual trade surplus with the United States, which currently stands at $250 billion. They assume that increasing the value of the yuan against the dollar will simultaneously decrease Chinese exports to the United States by making them more expensive and boost U.S. imports to China by making them cheaper. As the 2008 presidential election approaches, the U.S. Congress is actively discussing protectionist legislation and new tariffs that would punish China if its currency does not appreciate faster than the current rate of five percent.
But revaluation — no matter how vehemently it is advocated — is unlikely to achieve the desired result of reducing the U.S. trade imbalance with China. [Full Text]