The Yuan and the Dollar

The 21st century may very well be the century of great trade wars. They will be a source of clash for the main economic powers: China, the United States, Europe, Brazil and South America. The virulent quarrel facing Beijing and Washington concerning the value of Chinese currency, the yuan, provides a forecast.

Crumbling under the public and commercial deficits, the United States accuses China of maintaining its currency at an undervalued exchange rate in comparison to the dollar (the Europeans share the same opinion). Since 2008, Beijing has fixed the value of the yuan to about $6.83. This makes Chinese exports on the American market particularly competitive and, in return, this would protect the Chinese market’s importation of goods and services from the United States.

The Americans openly accuse the Chinese of manipulating their exchange rate. There is hardly a day spent in Washington without a Congress representative or executive exhorting Beijing to reevaluate the yuan. On hundred and thirty representatives, Republican and Democrat, have addressed a threatening letter to the Treasury this week: They demand that the American government impose “compensating rights” on Chinese exports.

This does not intimidate Beijing. Supercharged with a significant growth rate (9.5 percent in 2010, according to World Bank predictions), the Chinese prime minister, Wen Jiabao, offered an economy lesson to Americans on Sunday. The crisis is their fault: They don’t know how to manage their economy. Emergence from the crisis will be thanks to China: She drives the worldwide growth. The trade deficit that the United States suffers during its exchanges with China is due to globalization will not last. He explains: 60 percent of Chinese exports to the United States are the result of foreign agents installed in China. Beijing finances the national debt of the United States by buying its Treasury bills. The prime minister’s conclusion: There is no reason to revalue the yuan.

There is some truth to Wen Jiabao’s words. But two or three things need to be added to his political economy lesson. If it were convertible (which it isn’t), the yuan would take 20 to 30 percent on the markets! The crisis is also due to the gigantic structural deficit that a Chinese economy has imposed on exports. It is time for China to turn to a model of development that will benefit the internal market.

Another effort, Professor Wen!