The US Senate approved the program of the Currency Exchange Rate Oversight Reform Act of 2011 project plan on Oct 3 by 79-19. If passed into law it would allow the US government to slap duties on products from countries believed to be undervaluing their currencies to subsidize their exports. And it would cast a long shadow on the United States' relationship with China, whose renminbi is undoubtedly a main target of the act and will certainly be the main victim.
Pressuring the renminbi to appreciate is a bad choice for the US, as it will hurt both countries as well as global economic growth in the long run.
China insists that decisions concerning the renminbi exchange rate are its own concern and should be made after considering China's overall development. But for a long time, the US has repeatedly criticized China for grabbing a huge trade surplus through "undervaluing" the renminbi, and constantly pressured China to appreciate its currency.
However, China is not the only country that enjoys a huge trade surplus and thus trade disputes with the US. Trade disputes and negotiations between the US and Japan and Republic of Korea (ROK) tell us that the exchange rate is not the decisive cause of the US' trade deficit.
As analysts have pointed out the US should blame its own low deposit rate for the huge trade deficit. As long as Americans continue spending every dollar they have and will have, the US trade deficit will remain high. Forcing the renminbi to appreciate will only hurt the economic growth of both countries in the long run.
So the key to cutting the US trade deficit lies in internal reform, not external pressure. For example, the US can relax certain limitations on exports to China, as well as allow China to purchase more technology and oil from the US. When China National Offshore Oil Corporation (CNOOC) was blocked by Congress from purchasing Unocal, the New York Times commented that the lawmakers were not acting in accordance with the US' long and short-term national interests. The US can start changing such behavior and not focus solely on China's currency.
Even if the renminbi appreciates under US pressure, the US economy will not benefit much. Entrepreneurs have pointed out that increasing tariffs would hurt businesses in both countries, because it is common practice for US companies to manufacture products in China, where labor costs are lower.
True China's products are relatively cheaper, but the renminbi exchange rate is not the main cause of the US' high unemployment. Instead of offering more jobs to US workers, appreciation of the renminbi will only make US companies move their factories to India or Vietnam, where costs remain low. So the US will merely shuffle its huge trade deficits from one trade partner to another.
It is more practical to help promote China's exports to the world, so that US businesspeople can benefit from the upper-stream.
If the US thinks that appreciation of the renminbi will boost its own economy and persists in pressuring China it will only cause trade frictions and losses for both countries. The US should try to cooperate to overcome its economic difficulties, instead of blaming others for its own recession.
If the act is passed, we will only see more trade friction and disputes between China and US.
The author is a researcher and visiting scholar at the Massachusetts Institute of Technology.