We’ve known long ago that countries like Brazil and the U.S. like to put China in hot water for keeping its currency undervalued. You see, by keeping the Chinese Yuan (CNY) cheap, Chinese products (including labor) have an unfair advantage as it would take an importer less of his own domestic currency to pay for Chinese goods priced in yuan.
Since June last year, China has officially loosened its currency peg against the dollar, letting the CNY appreciate by an annualized, inflation-adjusted rate of 10%. But for some policymakers in the U.S., the current rate of appreciation is still not enough. If the Senate passes the legislation, it will move on to the House of Representatives where they will rehash the details of the bill.
But before the details of the legislation are outlined, you should know that bill is basically designed to require the Commerce Department to estimate currency undervaluation and then apply it to tariff calculations on imports. And as the largest supplier of imported goods in the U.S., China will take most of the heat of this bill.
So why is there a need for the bill and why are they prioritizing it now? As it turns out, those who argue for the bill say that it would boost job growth in the country especially in the manufacturing sector.
For instance, Senator Sherrod Brown from Ohio says that the unfair trade advantage that China has with a low yuan has caused factories to shut down, leaving a lot of Americans jobless. However, if competitiveness among U.S. manufacturers is restored, they would be more confident in hiring people.
Of course, not everyone is impressed by the idea.
On the other side of the globe, Chinese officials are dismissing the proposal, saying that it’s just another political game. They pointed out that U.S. policymakers have always been quick to point their fingers to China whenever the economy slows down, or if an election is coming up. After all, the yuan has already appreciated by 30% since 2005 and somehow the U.S. still managed to stack up job losses in the manufacturing sector.
Though many believe that the bill will get enough support at Washington, some market junkies say that it would still be subject to review by the World Trade Organization. And you know what, there are rumors going around that the institution may actually grant China retaliation measures if it finds that the U.S. is being a bully. Uh-oh.
Just to refresh your memory, in 2010 China wasn’t only the largest supplier of imported goods to the U.S. It was also the third largest market for U.S. exports. What if Chinese officials suddenly decide to give the U.S. a taste of its own medicine and puts a tariff on U.S. imports too? Yikes! Some American businessmen are already scared to their bones!
We’ve seen ample evidence of slowing growth in the U.S. However, in this sexy old man’s opinion, it seems like some policymakers are putting a lot more effort in measures that have very little promise than other pressing issues. Heck, even the currency bill has already preceded President Obama’s Jobs Act on the Senate’s priority list!
Whether or not politicians over at Washington are pushing for the bill to advance their political agenda, I wouldn’t know. But if there’s one thing I’m sure of, it is that the government should start to come up with more ways to spark economic growth before it’s too late.