Chinese Currency Issue

I don't purport to be an expert on currency valuation, but I am attempting to educate myself on the China issue. I understand that the US believes that part of the trade deficit between the US and China is attributable to the undervaluation in the yuan. And I understand China's response to the US.

I'm certainly no genius when it comes to economics; however, I wonder how much Senators Charles Schumer, Lindsey Graham, Charles Grassley, Max Baucus understand. Do they understand all the implications of their proposed legislation or are they just beating drums because it is the popular thing to do? If I were laying bets, my money would be on the latter.

The current piece of legislation put forward by the Senators proposes a good whacking for China if it doesn't take steps to significantly revalue its currency. It tasks the Treasury with identifying countries with "fundamentally misaligned" currencies to target for "priority action" - you can replace "China" in both of those quotes.

When it identifies a country that falls in that category, the Treasury must oppose changes to IMF governance measures designed to benefit the "designated country". Then the Commerce Department must take this designation into account when considering whether a country should be considered a market economy or nonmarket economy in antidumping cases.

If a country doesn't take action to remedy its fundamentally misaligned currency within 180 days of designation by the Treasury, it faces five consequences: 1. the level of undervaluation must be considered by Commerce in antidumping reviews; 2. the federal government is prohibited from purchasing goods/services from the country (China) unless it has joined the WTO's Government Procurement Agreement (I'm guessing China has not); 3. Treasury must seek special consultations at IMF under Article 4 of the Articles of Agreement (I have no idea what this is); 4. any projects financed through the Overseas Private Investment Corp. would cease; 5. the US would oppose financing for any projects in the country (China) by multilateral development banks.

The President is permitted to override any of these punitive actions if he/she determines that it is in the interests of national security or a vital economic interest.

If the designated country (China) has failed to remedy the situation after 360 days, the government is required to take the following additional actions: 1. USTR must request dispute settlement consultations at WTO; 2. Treasury must consult the Board of Governors at the Fed on whether remedial intervention is appropriate.

Again, the President could intercede, but the criteria becomes from stringent.

At the risk of appearing a China apologist once again, I think this legislation is shortsighted and guaranteed to provoke a trade war with China if it is passed. China cannot and will not revalue its currency today. I'm not suggesting that China shouldn't do so in the long run (over the next 10 to 15 years). But anyone paying attention over here - and that would include the Chinese government - watched Taiwan and Thailand, among others, revalue their currencies. It wasn't a pretty picture.

For those not clued in on China, IT ISN'T STABLE. It cannot withstand the monetary and political crisis that would ensue if it were to break free of the dollar. China in chaos is not something the world needs. This isn't Iraq today or Germany in the 40's. You aren't going to make China a democracy. They don't want democracy here. They want a benevolent dictator model. In absence of that, they have no problem with socialism - or Communism with Chinese characteristics. Shaking up the government isn't nearly as desirable as continuing to let it evolve over time.

I don't believe in wasting political capital when the marginal returns are negligible. Given that the Chinese government isn't going to revalue the yuan 30% this year, or whatever the US government is pushing for today, where should the US government flex its muscle? How about human rights? How about pushing China to continue to meet its WTO commitments? How about IPR, opening prohibited industries, revamping its legal system, adopting transparency in government practices? How about adopting and implementing food safety, drug testing and safety? The possibilities are endless.

For anyone not paying attention, here are the stories in the paper in the last 24 hours about food and drug safety: http://www.msnbc.msn.com/id/19513182/ , http://www.msnbc.msn.com/id/19487107/ ,http://www.msnbc.msn.com/id/19481931/ , http://www.msnbc.msn.com/id/19457564/ . China could use a bit of help and guidance in these areas. China generally needs and welcomes training and investment in its future - IPR training, food inspection training, etc.

In most cases, you get more bang for your buck with dialogue with China rather than sanctions or punishment. Sanctions and punishment invite retaliation which hurts American businesses in China struggling to compete with the Chinese, Europeans, Aussies, Indians and other Asians. China will be the economic battle ground for the next 50 years.

A healthy, strong, friendly China is something we should invite. If we whack them in areas where we have very little hope of succeeding, it dilutes the effectiveness the whacking we need to give them then they, with the assistance of Yahoo and Google, throw political prisoners in jail and torture them, or gun down a group of protesters or repress the citizens. Or when the entire government of Shanghai uses unlicensed versions of Microsoft Office on their PCs.