China's Currency: Economic Issues and Options for U.S. Trade Policy [May 22, 2008]   [open pdf - 319KB]

"The continued rise in China's 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 China's 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. […] Critics of China's currency policy contend that the large and growing U.S. trade deficit with China ($256 billion in 2007) is evidence that the yuan is undervalued and harmful to the U.S. economy. However, the relationship is more complex. First, an increasing level of Chinese exports are from foreign-invested companies in China. Second, the deficit masks the fact that China has become one of the fastest growing (and is now the third largest) market for U.S. exports. Finally, the trade deficit with China accounted for 29% of the sum of total U.S. bilateral trade deficits in 2007, indicating that the overall U.S. trade deficit is not caused by the exchange rate policy of one country, but rather the shortfall between U.S. saving and investment. That being said, there are a number of reasons why a more flexible currency policy could benefit both countries. For a brief summary of this report, see CRS [Congressional Research Service] Report RS21625, 'China's Currency: A Summary of the Economic Issues.'"

Report Number:
CRS Report for Congress, RL32165
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