A new currency bill aimed at China the US Senate Finance Committee passed last week will do little to help cut the Untied States' ballooning trade deficit. Instead, the legislation that smacks of strong protectionism, risks undermining ongoing bilateral efforts to reduce trade imbalances between the two countries.

 

Just a few days before China and the United States are to hold a new round of Strategic Economic Dialogue (SED), an important approach for the two countries to address key economic and trade problems they face, the US Senate Finance Committee voted 20-1 to pass a bill that would give the US government new tools to pressure China to float the yuan in open markets.

 

The legislation would allow US companies to seek anti-dumping duties on goods from any country that maintains a "fundamentally misaligned" exchange rate after being formally cited by the United States. At present, it is ostensibly targeted at China.

 

The supporters of the bill seem to believe that a faster appreciation in the yuan, the Chinese currency, is a panacea to the broadening US trade deficit with China or US losses in manufacturing jobs.

 

However, their assumption not only flies in the face of huge and critical efforts China has made to reduce its external imbalances, but also misses the underlying cause of the soaring US trade deficit.

 

The Chinese government has made it very clear with words and actions that the country is resolved to introduce greater flexibility into its foreign exchange regime at its own pace and reduce its external imbalances.

 

On one hand, since 2005, China has allowed the yuan to appreciate gradually and steadily against the US dollar. The yuan has risen by about 9 percent against the greenback since then. On the other, the country has tried hard to rein in export growth while boosting domestic consumption.

 

The Chinese government has adopted a slew of trade and tax policies, such as the reduction and removal of value-added tax rebates and the imposition of export taxes, to discourage exports. Meanwhile, China's domestic consumption is growing at its fastest pace in more than a decade thanks to increased government spending on public welfare and rising income levels for rural and urban residents.

 

All the measures the Chinese government has taken definitely point to balanced trade growth in future. For the United States, correspondingly, efforts are needed to persuade its people to consume less and save more if its current account deficit is to be narrowed.

 

Unfortunately, the new US bill tends to mislead its people into believing that protectionism can be an answer to its economic woes.

 

(China Daily July 30, 2007)