Continued American calls for strong upward revaluation of China's currency, the renminbi, in an attempt to rein in Washington's huge trade deficit with Beijing could backfire and be counterproductive to U.S. trade and monetary interests.

That is the conclusion of Claremont McKenna College economics professor Robert C.K. Burdekin. The former visiting senior fellow at the Honolulu-based East-West Center notes, "It is unrealistic that any renminbi exchange-rate adjustment could reign in the burgeoning U.S. trade deficit."

In the East-West Center's recently published "Asia Pacific Issues", Burdekin says "the overall imbalance (of U.S. trade) cannot be entirely blamed on China," despite the fact that Beijing does keep a tight lid on the renminbi's value. Burdekin adds "...just 10.4 percent of total U.S. trade was attributed to China in the first half of 2005."

The economics professor also notes, "The level of China bashing (in Washington) quickly recalled the Japan bashing of the 1980s in spite of the short duration of China's large bilateral surpluses and the fact that U.S. exports to China have grown nearly as quickly as Chinese imports," albeit from a base that would mean "U.S. exports would have to grow six times faster than imports to close the bilateral trade deficit."

Calls for import tariffs aimed at China and strong rhetoric from the Bush Administration ignores other important issues. Burdekin ventures, "Discouraging Chinese imports would likely benefit foreign producers who would then assume the supplier role, not U.S. firms." Fewer Chinese imports would not negate the fact that it was estimated the United States accounted for 70 percent of the world's current account deficits last year.

Burdekin notes that the Chinese authorities are not unaware of Washington's concerns, and have signaled a desire to be more flexible concerning their currency's value, "tying the renminbi to a basket of foreign currencies that would include the euro, the Japanese yen, and the South Korean won in addition to the dollar." A 2 percent upward revaluation of the renminbi last July did little, however, to dampen the calls for a larger rise in the Chinese currency's value.

A strengthening Chinese currency could prove costly in other ways to the United States. Burdekin says "... an exchange rate reduction could pose considerable financial risk to the United States by threatening the vast inflow of Chinese funds. Ironically, this inflow plays an essential role in the U.S. economy as it supports the trade deficit as well as the level of U.S. interest rates." Burdekin notes "China's reserve accumulation of U.S. Treasuries (bonds) was $207 billion in 2004 (and) total holdings were roughly $616 billion."

The economist adds that "driving China out of the market for U.S. Treasuries would have calamitous consequences, not only for the (value of) the dollar but for U.S. credit markets and the U.S. economy in general. It could also be bad news for Europe since a shift away from the dollar would inevitably boost the value of the euro and further the loss of competitiveness vis-��-vis the United States."

What should Washington be doing? Burdekin has one answer. "The U.S. government should hope that China stands fast and does not make any move to pull its funding of the U.S. trade deficit and, instead, invest in other foreign currencies or its own economy." He concludes, "The Chinese preference for gradual exchange rate adjustment may well be the best outcome for the United States. In any event, the call for renminbi adjustment to reverse the U.S. trade deficit appears unwarranted on economic grounds and little more than a politically charged chimera."

This article is provided by East-West Wire, the news service by the East-West Center which was established by the US Congress in 1960s' to promote the mutual understanding and cooperation between Asian-Pacific governments and peoples.