Responding to an Undervalued Yuan
Dean Baker offers one of many, many alternative responses we could take to China’s policy of an undervalued yuan. As has been pointed out attempting to apply rhetorical pressure to the Chinese authorities is counter-productive but such a move need not require putting overt pressure on the Chinese nor would it require their cooperation:
Just as China can set a value of its currency against the dollar, the US government can set a value of the dollar against the yuan. The Chinese government currently supports an exchange rate at which the dollar can buy 6.8 yuan. This high value of the dollar makes US goods uncompetitive relative to China’s. To make US goods more competitive, the US could adopt a policy through which it will sell dollars at a much lower price, say 4.5 yuan.
The difference in exchange rates would provide an enormous incentive for Chinese businesses and individuals to exchange their yuan at the Treasury rate rather than the official Chinese rate. While this may violate Chinese law, the enormous potential profits would make the law difficult to enforce. In a relatively short period of time, the US exchange rate is likely to become the effective market exchange rate.
Of course, this situation of warring exchange rates would lead to a period of instability and unnecessary hostility between the two countries. However, it would send an important signal that the US government is in control of its dollar destiny: Washington has the ability any time it chooses to push the dollar down to a more reasonable level against the yuan.
As Dr. Baker points out, such a course of action would have a price, and several generations of American politicians, Republicans and Democrats, have shown little appetite for paying a political price in dealing with China, preferring to let the country pay an economic and social price.