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The Yuan also rises

Appreciation of the Chinese yuan against the dollar will do little to improve the U.S. trade deficit with China. The 2.190 percent managed float is based on a secret basket of currencies and allows for the Chinese government to intervene if the daily exchange rate should increase by more than 0.3 percent.

The Plaza Accord signed at the Plaza Hotel in New York City on Sept. 22, 1985, brought about the appreciation of the Japanese yen against the dollar in an unsuccessful attempt to balance America's huge trade deficit with Japan. The cause of the trade deficit with both Japan and China is voracious American consumerism. Owing to a low savings rate, Americans have a high amount of disposable income. Despite a 51 percent appreciation of the yen against the dollar, American consumers continued to buy Japanese goods. No matter how much the yuan appreciates against the dollar, American manufacturers will not be able to compete against cheap Chinese goods.

The irony of the yuan's appreciation is that it might actually increase the trade deficit while hurting U.S. attempts to keep inflation down. Off of the peg, China will still maintain a trade surplus; however, it will be less motivated to finance U.S. debt and provide financial backing for low-cost mortgages by purchasing U.S. treasury bonds. Heretofore, China was willing to accept a low yield on its treasury bonds to help ward off criticism about its trade surplus. The United States will have to pay higher interest rates to maintain Chinese interest and to attract other investors.

In reality, the revaluation is a shallow, short-term political victory giving bragging rights to the Bush administration, and Treasury Secretary John Snow in particular, that they took "concrete steps to set the trade deficit right." When it becomes obvious that the revaluation has not solved the problem, tensions between the United States and China will again play center stage. It is easier to point a finger at another country, rather than at a voter.

Trade deficits can be the kindling for international dispute. We need a new system of calculating trade deficits that is based on a globally negotiated method of calculation, universally applied, and that more accurately reflects which companies and nations ultimately retain profits. Many exports coming from China to the United States are actually products manufactured in U.S.-owned and capitalized factories in China.

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