China's Currency: Economic Issues and Options for U.S. Trade Policy

The continued rise in Chinas trade surplus with the United States and the world, and complaints from U.S. manufacturing firms and workers over the competitive challenges posed by Chinese imports have led several Members to call for a more aggressive U.S. stance against certain Chinese trade policies they deem to be unfair. Among these is the value of the Chinas currency the renminbi or yuan relative to the dollar. From 1994 to July 2005, China pegged its currency to the U.S. dollar. On July 21, 2005, China announced it would let its currency immediately appreciate by 2.1 and link its currency to a basket of currencies rather than just to the dollar. Although the yuan has appreciated 16 since 2005, many Members complain that China continues to manipulate its currency in order to gain an unfair trade advantage, resulting in U.S. job loss. Numerous bills have been introduced to induce China to adopt a more flexible currency policy. If the yuan is undervalued against the dollar as many analysts believe, there are likely to be both benefits and costs to the U.S. economy. It would mean that imported Chinese goods are cheaper than they would be if the yuan were market determined. This lowers prices for U.S. consumers and dampens inflationary pressures. It also lowers prices for U.S. firms that use imported inputs such as parts in their production, making such firms more competitive. When the U.S. runs a trade deficit with the Chinese, this requires a capital inflow from China to the United States, such as Chinese purchases of U.S. Treasury securities. This, in turn, lowers U.S. interest rates and increases U.S. investment spending. On the negative side, lower priced goods from China may hurt U.S. industries that compete with those products, reducing their production and employment.