The Chinese currency dispute

LOS ANGELES — In the increasingly tense matter of China's Currency v. U.S. Trade Deficit, it needs to be noted that both sides stand to become losers if either side insists on winning.

China doesn't want to make its currency much more expensive relative to others' (especially the U.S. dollar) because, among other notable effects, China's voluminous exports would become more costly abroad. That would reduce foreign sales, cut profits, and make more workers jobless as companies cut back to balance the ledgers.

You can understand the Chinese point of view, right?

For its part, the United States wants China to adjust the value of its currency — known as either the renminbi or the yuan — because artificial under-valuation makes Chinese exports so much cheaper that U.S. manufacturers can't compete. The result: Domestic jobs are lost, and American consumers so readily, if not greedily, gobble up cheaper Chinese products as to render the American trade deficit monstrously out of whack.

You can understand the U.S. point of view, right?

So the American government remains fixated on the China currency-fixing issue. The 2006 Economic Report of the President, just released, goes into the blame game, claiming China is a big reason for America's titanic foreign indebtedness.

This argument is a bit harder to accept.

After all, the driving force behind the U.S. trade deficit is the happy addiction of so many of us Americans to spending far more than we earn.

Let's not pretend that the American middle-class family's appetite for all sorts of cheap junk is the product of some Beijing-hatched communist conspiracy. Until we Americans start doing a better job of balancing our own family budgets, and until Washington gets its own spending habits into better balance, a substantial trade deficit will be with us for the foreseeable future.

To its credit, the United States Treasury Department has sought to conduct its dialogue with Beijing on this matter in an intelligent manner, largely in private and mostly in proportion to the true dimensions of the issue. It realizes full well that sudden and large revaluations of the renminbi would, undoubtedly, attract rapacious currency speculators, probably encourage some wealthy Chinese to try to convert their suddenly more valuable Chinese dollars to foreign dollars, thus triggering capital flight, and add to domestic unemployment. For the sake of argument, let us assume that a wildly unstable China is in no one's national interest.

What's more, the level-headed monetary sophisticates at Treasury understand that America's own international-trade record is far from saintly. Many U.S. exporters have received substantial tax breaks that in effect lowered their costs and added to their profits just as China's undervalued currency helps Chinese exporters sell more abroad.

In fact, the World Trade Organization — which is anything but a communist conspiracy — recently revealed plans to levy fines against the U.S. for its illegal export-subsidy practices.

The U.S. Treasury Department is also to be commended for keeping the bitter Chinese currency dispute in proportion to reality. It knows that, for the first half of last year, China, which itself has run up trade deficits with other countries, accounted for little more than 10 percent of all U.S. trade. So even if the renminbi were revalued dramatically upward, the U.S. trade deficit as a whole would still stick out like the sore thumb that it is.

There's another point to consider, as Richard C.K. Burdekin of the East West Center in Hawaii pointed out in a valuable and timely paper released last month. Even if Beijing were to increase the value of its dollar by 25 percent (very unlikely but ... ), then its huge stockpile of U.S. dollars — China is one of the largest holders of U.S. Treasury bonds, which means that it effectively finances our current spending — would suddenly be worth 25 percent less in Chinese dollars. And were the Chinese to begin selling off its U.S. Treasury holdings in anticipation of pushing the value of its own currency upward, other holders would start selling their stockpiles, too. The stampede out of the dollar would be very bad news for the United States. It would be very ugly indeed.

Critics of China in the U.S. Congress, even if they actually mean well, should look before they leap into confrontation with Beijing. The rush to push the Chinese faster than they wish to move could backfire badly. Sure, the Chinese understand the economic logic behind the argument that an artificially weak renminbi is ultimately bad for their economy in the long run precisely because it is artificial. The problem is the short run. If only Chinese authorities could figure out a way of revaluing that would not imperil the economy, trigger unemployment and unleash further social unrest, they would surely do it. My sense is that they simply haven't figured out how to do it yet.

UCLA professor Tom Plate, a member of the Pacific Council on International Policy, is a veteran U.S. journalist.