For U.S. manufacturers who insist an artificially low exchange rate between China's currency and the U.S. dollar has put them at a distinct competitive disadvantage, this October will be an even more significant month than was this past July. October is when the next U.S. Treasury report on Chinese currency practices is due. July was the month China said it would untie its currency, the yuan, from the U.S. dollar and link it more loosely to a collection of currencies and allow for continuing limited changes in value. This revaluation of the yuan could make Chinese exports more expensive and its own imports more costly, although that is far from assured.
What is clear, however, is that manufacturers and such business groups as the Washington, D.C.-based National Association of Manufacturers (NAM), which has been pushing Chinese currency revaluation for nearly two years, will be closely watching the evolving situation. "By October, when the next Treasury Department report of currency manipulation is due, we hope to see that China's currency has moved significantly enough to begin correcting long-standing trade distortions," NAM President John Engler said on July 21, the day China announced its new currency policy. Engler estimated the yuan could be revalued by as much as a percentage point every three days. "While the initial 2.1% revaluation is inadequate, we view it as the beginning of what should be a significant revaluation," he added.
A bit more cautious is Thomas J. Duesterberg, president and CEO of the Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy research group. "The appreciation of the yuan is a significant first step in addressing China's global trade imbalance, but it is so small that it will have little impact on the trade deficit with the United States," he says. China's trade deficit with the U.S. for the first five months of 2005 was $72.5 billion. "China's currency needs to be revalued by 25% to 40% to reflect its true value and to have any impact at all on the large and growing trade deficit with the U.S.," figures Duesterberg.
The consequences of China's change in currency exchange rates will be more political than economic, predicts Peter Morici, a professor at the University of Maryland's Smith School of Business in College Park. "Repeatedly the Bush Administration has failed to acknowledge the dislocations and distortions imposed on the United States and other economies by China's currency regime and resisted Congressional critics who would prefer a more forceful policy," he asserts. "China's move will have the effect of dividing critics on [Capitol] Hill and giving [Treasury] Secretary [John] Snow some political cover."
All Congressional critics are not likely to be quieted. Indeed, October could see lawmakers revive a bill co-sponsored by Sen. Lindsey Graham, R-S.C., and Sen. Charles Schumer, D-N.Y. Their legislation would slap duties on imports from China unless Beijing acted to redress significantly the undervaluation of yuan. A July vote on the measure was deferred to October after its co-sponsors consulted with with U.S. Treasury Secretary John Snow and Alan Greenspan, chairman of the Federal Reserve.