China’s currency is a reoccurring topic during the evolution of the Sino-US relationship. Especially election is nearing, it inevitably appears on the table. U.S. leaders took swipes at China on Oct. 6 2011, as the Senate voted to advance a bill to penalize countries said to be manipulating their currencies and President Barack Obama accused the China of manipulating the yuan.

The Senate’s currency bill would compel the Obama administration to levy tariffs and other penalties against China and other countries for having “misaligned” currencies. The measure reflects lawmakers’ concerns that China holds down the value of its currency, the yuan, in an effort to boost the country’s exports.

Mr. Obama’s rare public criticism of China came at a White House news conference earlier in Oct. 6th where he accused China of manipulating the yuan and taking other actions to bolster its growth at the expense of the rest of the world.

“China has been very aggressive in gaming the trading system to its advantage and to the disadvantage of other countries, particularly the United States,” Mr. Obama said. However, the president also expressed reservations about the Senate’s bill, suggesting it could violate America’s international treaty obligations on trade. He also acknowledged China has allowed some appreciation in the yuan, but said “it’s not enough.”

The growing focus on China comes as lawmakers worry about the faltering U.S. economy and its role in the elections, a scant 13 months away. China’s management of the yuan has consistently bothered policy makers, particularly those from manufacturing states, who insist that Beijing holds down the value of its currency to benefit Chinese exports to the detriment of U.S. companies.

A number of influential business groups, ranging from the U.S. Chamber of Commerce to the Business Roundtable, have warned that taking action against China could result in retaliation and undermined any potential gains to the U.S. economy.

“I don’t think now is the right time to embrace a trade war,” said Sen. Claire McCaskill (D., Mo.), who opposes the currency bill.

The Senate voted 62-38 to invoke cloture and cut off debate on the China currency legislation, but further progress on the currency legislation was delayed by disagreements over amendments. If enacted, this legislation would deem undervalued currencies actionable subsidies.

As expected, on Oct 10, China warned the United States that it would damage relations, and American jobs, if it forces Beijing to let its currency rise under a law to be voted on in the U.S. Senate on Tuesday.

On Oct 10,  Vice Foreign Minister Cui Tiankai underlined Beijing’s opposition to the bill, saying it could trigger a trade war and hold back global economic recovery. He said that relations could also be further hurt by U.S. arms sales to Taiwan.

“The currency bill in no way represents the reality of the economic and trade relationship between China and the United States, and it might have an adverse impact on the development of the relations between the two countries,” he said.

“Should the proposed legislation become law, the only result would be a trade war between China and the U.S. and that would be a lose-lose situation for both sides,” elaborated Cui, who currently heads the China delegation for G20 negotiations.

Last week, China’s central bank along with commerce and foreign ministries jointly warned that enactment of the proposed currency law could lead to a trade war between the world’s two top economies.

“If this type of situation occurs, of course it would be detrimental to the development of economic and trade relations between China and the U.S. and detrimental to U.S. economic and job growth,” Cui said. “At the same time, it would hinder global economic recovery.”

Beijing says it is committed to gradual reform of the yuan, which has risen 30 percent against the dollar since 2005.

Scholars are holding opinions about why the currency issue reemerges at this special stage.

Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management and a former aide to House Speaker Boehner, said that the number one election issue is going to be jobs, so every politician wants to show that they’re doing something about jobs. China’s trade imbalance with the U.S. is a real issue: If China’s markets were more open and encouraging consumer demand instead of piling up reserves, it could help boost job growth in the U.S. So there’s a temptation to seize on China’s currency policy as a “silver bullet” that will solve this concern, by making U.S. goods cheaper and Chinese ones more expensive, even though the real problem is more complex than that.

Tan Yaling, the head of the China Foreign Exchange Investment Research Institution, said that passing such bill is turning an economical issue into a political one. “The bill is a trick”, Yaling said. “Employment rate is a domestic question that is related to salary and occupational pattern. Rather than blaming China’s currency as the main cause of unemployment, the US should reflect on itself to seek the real problem.”

Shanghai Academy of Social Sciences deputy director, Xu Mingqi, holds the belief that as a result of financial crisis fallout, together with deficiency of new industrial growth, the US economy grew weakly in this environment. From the political aspect, there were only 13 months until the presidential election when unemployment rate hit 9.1%; Standard & Poor degraded US to a lower rank; the very recent Wall Street protest, which is developing into national wide. All of these is able to make Congress nervous enough. Under such circumstances, China was presented as a scapegoat that distracts domestic concentration and shifts responsibilities.

This action draws many domestic critics. In his Oct.3 article, a researcher of The Heritage Foundation of U.S think tank pointed out that China’s currency is not responsible for U.S unemployment. In the past 20 years, the research shows that in years of yuan is devaluated, unemployment rate stays low. In recent years, when yuan keeps rising in value, unemployment rate however, rises as well. USCBC Chairman John Frisbie also indicates that China’s currency has risen 30% against dollar since 2005, while the U.S. manufacturing industry keeps losing jobs.

On Wednesday, US House Speaker John Boehner condemned Senate-passed legislation to punish China over its alleged currency manipulation and pushed President Barack Obama to take a stand on the bill.

“While the president is out campaigning instead of governing, it’d be nice for the president of the United States to make clear what his position is on this China currency bill,” the Republican lawmaker told reporters.

Boehner has repeatedly criticized the measure, which calls for retaliatory duties on Chinese goods if the yuan is found to be unfairly “misaligned,” likely dooming its prospects in the Republican-held House of Representatives.

The speaker said he was “concerned” about China’s currency policy, but signaled those worries were outweighed by “grave concerns” that the measure could trigger a destructive economic feud between the two economic superpowers.

“Given the volatility in the world markets, given the uncertainty about the world economy, for the Congress of the United States to be taking this step at this moment in time poses a very severe risk of a trade war,” he said.

The White House has voiced concerns that the legislation, which calls for tariffs on imports from countries with deliberately undervalued currencies, could violate international trade rules.

A commentary from UK Financial Times expressed the concern of this unilateral action, which is “a very dangerous thought, a bad idea.” It says that people who are concerned with  the future of global financial system should fight against this bill.

“America is still the world’s largest economy, while China is at the second place. Therefore, Sino-US trade war will hurt the global commerce, especially when euro crisis is out of control,” said by former World Bank economist Uri Dadush.

Whether for the benefit of China, the US, or even the global system, there is one thing for sure that it’s not the time for triggering the trade war. Making a commercial issue into a political one will do no good but is will step up pressure on both diplomacy and economic association between two countries, which ultimately will lead to lose-lose situation. Currency is a domestic problem that is under national sovereignty. As a significant player in world economic recovery, China deserves more respect and space to act positively on the global stage.

Written by Chang Yu

Photo: Barack Obama hosts then Chinese president Hu Jintao at a working dinner in the White House in January. / Rex Features

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