Despite growing criticism of China’s economic policies from both parties in Congress, U.S. Treasury Secretary Timothy Geithner decided not to label China a currency manipulator in early April. This decision seems to reverse President Obama’s February pledge that he would take a tougher stance on trade disagreements with China, and suggests that his administration will pursue a more diplomatic approach rather than play the blame game with its economic rival. Domestically, however, Senators Charles Schumer (D) and Lindsey Graham (R) have threatened trade sanctions, arguing that as long as China artificially keeps the yuan pegged to the dollar, making their goods artificially cheaper on the international market, American exports cannot compete.
While expected, Senators Schumer and Graham’s aggressive response is simply a misguided reaction to frustrations over unemployment in the U.S. This response caters to popular emotions and is not rational policy. Instead, the U.S. should adopt a more conciliatory tone toward China by persuading it to voluntarily revalue its currency and by addressing the issue multilaterally at the upcoming G20 economic summit in June. Doing otherwise threatens Sino-American cooperation on other significant issues such as environmental protection and a nuclear Iran. Besides, China already has its own motivations for devaluing the yuan and would be more likely to do so without U.S. finger pointing.
Recently, there seems to be increasing disagreement between the United States and China. President Obama’s visit to Asia last year revealed that China is unwilling to significantly budge on issues of human rights, national sovereignty, and environmental commitment. Part of this obstinacy comes from China’s distrust of America’s long-term intentions. Part, however, also comes from the aftermath of the global economic downturn. Having recovered from the economic crisis of 2008 much sooner and with more vitality than most other nations, China’s confidence on the world stage has grown significantly. The heavily controlled visit by Obama is just one example; China’s refusal to take the U.S. seriously at the Copenhagen climate summit by repeatedly snubbing Obama is another. In the past few months, confrontations involving Internet censorship with Google and arms trade with Taiwan have also revealed China’s increased assertiveness. These issues have long been points of criticism between the East and the West, but Premier Wen Jiabao’s sharp criticism of U.S. economic mismanagement last year reveals that China has become more vocal about its demands. China finally feels that the balance of power is beginning to tip in its favor and it will eagerly exploit this perceived truth through more assertive international policies.
For the United States, this new attitude makes China much harder to handle. Meeting stubbornness with its own obstinate policies will only result in a cooling of Sino-American relations, however. After President Obama’s call for a tougher stance on the undervalued yuan, China responded several days later by resolutely denying any future plans to change its policy. What the U.S. should realize is that the tough-on-China approach contributes to China’s refusal to back down in the first place. China is resisting American pressure for fear of appearing weak to the international community. The harsher than expected response from China after the U.S. announced plans to sell arms to Taiwan makes this trend increasingly clear. China’s warnings seem to be an attempt to defy American demands rather than legitimately protect its national security. Giving the perception that China is to blame for America’s trade deficit only decreases the chances of constructive dialogue.
Even without U.S. pressure, there are good reasons for China to revalue the yuan on its own. Although it recovered from the global economic meltdown rather quickly, Chinese monetary policy has overshot its mark and the country now runs the risk of an inflationary cycle. Consumer price inflation was reported at a modest 2.4 percent in March, but property prices rose 11.7 percent in the same month, suggesting an asset bubble that could spell macroeconomic woes for China. Moreover, lending during the first month of 2010 rose to $203 billion, surpassing the previous three months combined and forecasting future price increases. Banks are eager to increase interest rates to encourage saving, but fear that doing so would attract capital inflows from foreign investors and exacerbate inflation. A stronger yuan would cushion the impact of capital flows by making the purchase of Chinese currency by foreign investors more expensive and thus less attractive. Zhou Xiaochuan, the chairman of the People’s Bank of China, said last month that controlling the value of the yuan is an emergency measure that will end “sooner or later.” With exports in the month of February 8 percent higher than that of two years earlier, the Chinese export market is rebounding quickly and will soon no longer need protection from an undervalued yuan. In addition, a revaluation of the yuan is a step that China has taken in the past. In late 2007 and early 2008, consumer price inflation soared to 8.7 percent, reaching a ten-year high. China allowed the Yuan to appreciate until pegging it against the dollar several months later.
Another factor that weakens the rationale for increasing pressure on China is the overstated harms of an undervalued yuan to the U.S. economy. Certainly a cheaper currency makes Chinese goods preferable to American ones, but this affects only American companies in direct competition with Chinese ones. Instead of being harmed, companies that rely upon steel and electrical machinery to create their own products actually benefit from cheaper Chinese exports in these areas. The picture on the consumer-end is similar; many low-income American families rely upon cheap retail stores that import many of their products from China. Thus, even if balancing the trade deficit creates more jobs, Americans might not gain more purchasing power due to the loss of cheap products. Ultimately, whether there is a net gain in economic activity and jobs will depend on the ratio of direct competitors to companies that buy materials from China. Given the diplomatic costs of applying pressure, the benefit to the U.S. economy may not be worth the risk.
In the end, China will revalue the yuan on its own terms, not as a response to U.S. demands. Increasing the pressure will not only make currency revaluation less likely, but also will prove counter-productive toward other American goals in Asia. Both nations have traded accusations about engaging in protectionism, but neither has taken any dramatic measures. Alienating the Chinese with harsher rhetoric or imposing further protectionist measures may escalate tensions to the point of stifling trade, hurting both Americans and Chinese. China has already demonstrated its willingness to hinder free trade by setting a list of preferred suppliers to the government late last year. Outside the market, China may use its importance as the world’s largest emitter of greenhouse gasses to disrupt progress in the global movement for environmental protection. Perhaps most importantly, China has the ability to frustrate efforts to prevent a nuclear Iran by refusing to participate in multilateral economic sanctions of that country.
That is not to say that the U.S. ought to soften its stance against China. Doing so would also be dangerous. Appeasement would achieve the same effect of emboldening the Asian power by showing American weakness. Obama’s soft stance during his trip to Asia and the administration’s decision to postpone a meeting with the Dali Lama certainly did not make China sensitive to American concerns. Instead, the U.S. needs to walk a fine line between cooperating with its rival and appearing to give in to China’s new hubris. This means that the U.S. should continue to declare its own terms, but give China a chance to accept these terms voluntarily. Any more pressure might hurt Sino-American relations, but any less might encourage China to flaunt American interests further.
In a display of quid pro quo, President Hu Jintao attended a nuclear security summit and agreed to work with the U.S. to deter a nuclear Iran after the Washington delayed its report to Congress. This step in the right direction reveals that China is willing to meet cooperation with cooperation. Caving in to domestic pressure and raising the possibility of sanctions will only frustrate recent gains in Sino-American relations. Ultimately, each declaration against China makes cooperation with it more difficult. At times, this loss is outweighed by the benefit of standing resolute. Increasing pressure against currency manipulation, however, is not one of these times. Given the current inflationary pressure in China and the uncertain benefits of currency appreciation, the risk of inflaming Sino-American relations is simply too great. The U.S. should be willing to work toward effective policy solutions, while simultaneously refusing to capitulate to all of China’s demands. The most important question is where to draw the line.


