Rational calculation needed

US domestic politics often cloud the yuan exchange rate issue instead of making way for mutual economic benefits

Although China and the United States have agreed on a stable yuan, we should notice that since July 2005, the yuan has appreciated by up to 21 percent. But this has not significantly improved the United States' trade deficit nor reduced China's trade surplus. The driving forces of today's exchange rate have gone far beyond bilateral trade. To understand what is happening, an analysis of the open global production and trading system is necessary. It is unlikely that greater yuan appreciation, as demanded by some US Congress representatives, can alter China's status as the "workshop of the world" and substantially boost US exports.

While the US could experience limited economic gains if any form of sanction is enacted, the Chinese economy will suffer serious damage. First, a surcharge tariff of 20 percent or more will drive a large proportion of Chinese exports out of the US markets and will significantly reduce external demands. Second, many workers in coastal export processing zones will lose their jobs, resulting in a slowdown of economic growth and social unrest. Third, as more speculative capital enters China with a bet on yuan appreciation, the problem of an asset bubble in the Chinese economy will worsen and could spiral out of control.