It is not a tricky job for the well-informed to find out that the Currency Reform for Fair Trade Act has been taken as a political show ahead of the Nov. 2 mid-term U.S. congressional elections and has nothing to do with promoting trade or fairness.
Prior to the vote, sponsor of the act Tim Ryan, an Ohio Democrat, professed that the act may be "extremely favorable" for the Democrats to regain the electorate this fall, because it helps stir the "voters' passion" from America's midwestern industrial region.
Ryan and other sponsors argued that the under-evaluation of the yuan translated into China's unfair competitive advantage in international trade, and exacerbated U.S. trade deficit against China. They claimed that a sharp appreciation of yuan was the only solution to the trade imbalance.
However, they obviously ignored some basic facts.
The congressmen should take note that the China-U.S. trade imbalance is the outcome of incremental international division of labor.
In the past three decades of free trade and international competition, U.S. competitive advantage has passed from manufacturing industry to the service sector with higher added value. Reducing imports from China can not heal the condition of U.S. manufacturing incompetence against the world.
A 20-percent appreciation of the yuan along with a similar currency appreciation by other emerging Asian economic entities may contribute at most 1 percent of the U.S. gross domestic product growth, said Olivier Blanchard, chief economist of the International Monetary Fund (IMF).
The congressmen should understand that what is behind the huge U.S. trade deficit is perpetual expansionary fiscal and monetary policies, high debt ratio, low residential deposit ratio, credit deficit and trade barriers for hi-tech exports.
They should also know that U.S. companies and consumers benefit from Chinese low-price commodities. A sharp appreciation of the yuan equals to a sharp rising prices of Chinese products, which are not helpful to the U.S. economy.
On the other hand, foreign-funded enterprises in China, including U.S. companies, are major contributors of China's trade surplus. These companies are the biggest beneficiaries of Chinese exports to the United States. A sudden sharp appreciation of the yuan and a hike of production costs that follows would incur not only bankruptcies of some Chinese firms but also the loss of U.S.-funded enterprises in China.
Given that the Chinese government will not succumb to external pressure on the yuan issue and the act is concerned with international obligations, its entry into force would put the United States in a position of contravening international trade rules and igniting trade conflicts.
It is true that the China-U.S. trade imbalance is an important issue. But it is more concerned with the imbalance of international division of labor, the imbalance of U.S. macroeconomic policies, and the imbalance of China-U.S. development levels, economic structure, and saving/consuming ratios.
The United States should note that the Chinese government has taken proactive measures to transform its growth model, expand domestic demand, decrease deposit ratio, increase imports and strengthen social welfare system.
These efforts help with the U.S. government's efforts to reduce trade deficit, promote savings, invigorate real economy and increase exports.
As HSBC Group's chief economist Stephen King said, the United States should discard protectionist opinions and take actions in accordance with China's reform because when China implements the reform and before Chinese families start to spend rather than to save, no matter how much yuan appreciates, China's current account surplus can't vanish.
With no doubt, U.S. congressmen care a lot about the "voters' passion" that Ryan mentioned. But they really should look beyond the short-term benefits of a particular sector, or interests of a particular region or a particular group. Healthy China-U.S. economic and trade ties benefit the two nations at large.