As reported in the above-linked article, China has softened its stance on the yuan exchange rate dispute and will send an envoy to Washington to try to defuse the issue.
I’m not surprised. Since the U.S. is the one with the huge trade deficit, we have absolutely nothing to lose by taking action to restore a balance of trade, and China has no effective means of retaliation. Like a mugger who stands over his victim, wielding a knife, China now finds themselves powerless when the U.S. draws a 9 mm.
The threat of the dumping of U.S. treasury holdings in retaliation for a move to label them a “currency manipulator” – a threat never made by China but merely feared by trade policy hand-wringers – was never a real threat. Between other nations and the Federal Reserve, China’s treasury holdings could easily be absorbed. On the other hand, the threat to China’s economy from the loss of its U.S. exports is real and serious. It could collapse their economy.
The U.S. has the upper hand. The Obama administration should pull the trigger on that 9 mm. Label them a “currency manipulator.” Then hit them with tariffs, steep enough to restore a balance of trade. If they complain, then remind them that, by all rights, we should hit them with even steeper tariffs and run a trade surplus until we’ve recovered the $2 trillion that they’ve drained from our economy in the last decade.
This is the first time that China has shown even a hint of humility in its relationship with the U.S. since it dictated to the Bush administration how many “very”s should precede the word “sorry” in Colin Powell’s apology for the American reconnaissance plane that supposedly wandered over their air space. It’s a sign of just how terrified they are of losing even a little of their U.S. market share. And it’s a sign to the Obama administration that they have nothing to fear from China’s hollow threats.