The U.S. administration should notify the Chinese side immediately that, if China fails to make the “down payment” appreciation of 10-15 percent by the time of the second strategic economic dialogue in May and prior to the release of the U.S. Treasury’s next semi-annual report, it would be labeled as a “currency manipulator,” recommended Bergsten. He also said that the United States should notify its G-7 partners and the International Monetary Fund that it plans to make such a designation, with the goal of galvanizing a multilateral effort on the issue, reaching a “Plaza II” or “Asian Plaza” agreement that would work out a larger appreciation of the renminbi.

It has been a practice for several U.S. administrations to strongly press its trading partners to increase the value of their currencies with the purpose of reducing its own trade deficit. During the 1970s, the United States forced the Deutsche Mark to appreciate greatly. It had appreciated from 4.2 Mark against $1 in the 1960s to 1.5 Mark against $1 in 1990s, up by 64 percent. Similarly, the United States put pressure on the Japanese yen in the 1980s. Thus, the Japanese currency jumped from 263 yen against $1 in 1985 to 128 yen against $1 in 1988, up by 51 percent. Still, the United States stayed in deficit with these countries for many years. In 2000, the U.S. trade deficit with Germany and Japan reached $29.5 billion and $81.3 billion respectively. In 2006, the number went up to $47.8 billion with Germany and $88.5 billion with Japan.

The relationship between the euro and the U.S. dollar is also a case in point. By the end of January 2002, 1 euro was equivalent to $0.86; On January 1, 2006, it was equivalent to $1.29, an increase of 50 percent. Nevertheless, the U.S. trade deficit with the euro zone rose sharply from $54 billion in 2001 to $91.5 billion in 2005, an increase of 70 percent. It is a traditional international trade philosophy to rely on the pressure of currency appreciation alone to reduce one’s own trade deficit, which must be improved and updated.

In December 2006, the appreciation of the renminbi raised the price of Chinese-made textiles and apparels sold in the U.S. Christmas market approximately by 5 percent and that of toys by about 10 percent. Most of China’s exports to the United States are daily consumer goods and are needed by the majority of U.S. consumers. The rapid appreciation of the renminbi will naturally affect the daily life of ordinary Americans.

In an article titled “The Worth of the Dollar,” Ronald McKinnon, a professor of economics at Stanford University, pointed out that a large depreciation of the U.S. dollar against the renminbi could not correct the savings imbalance between the United States and China; however, it could cause a major bout of monetary instability with deflationary consequences in China itself. “And if China is the linchpin, and such other countries in Asia and even Europe follow with their own appreciations against the dollar, the inflationary pigeons may well come home to roost in the United States-as in the 1970s,” McKinnon warned.

Unfortunately, due to constant pressures on China to appreciate the renminbi against the U.S. dollar, Paulson has departed from his alleged position of a strong U.S. dollar. If China failed to stand the pressure and greatly appreciated the local currency, it would then fall into the dilemma of deflation just like Japan in the 1980s and 1990s, however, its trade surplus would not shrink because of this, said McKinnon. He predicted that the United States was hurting China without getting any benefit through the appreciation of the renminbi.

In an interview with International Herald Tribune on September 10, 2006, John Frisbie, President of the U.S.-China Business Council, clearly indicated that the council would not agree to take such a tough measure to force appreciation of the Chinese currency. He said the exchange rate of the renminbi was not the fundamental reason for the huge U.S. trade deficit with China; what’s more, the appreciation of the yuan would not be the absolute solution to the U.S. trade deficit with China, as the United States itself had already incurred a huge trade deficit.

The U.S.-China Business Council includes 256 multinationals that have engaged for many years in promoting economic and trade cooperation between China and the United States, so it is they rather than some politicians and scholars who have a say in the matter of the exchange rate of the yuan. These multinationals hope that the exchange rate of the renminbi can keep relatively stable, for a big appreciation of the yuan will directly increase their investment costs in China and affect their profits from China-U.S. trade transactions.

In the United States, the issues of the exchange rate and trade deficit with China have been painted with political colors, becoming tools for some politicians to achieve their own goals. Such consequences will surely harm U.S. interests and the interests of American consumers.

Due to the continuing appreciation of the renminbi exchange rate and the reduction of tax rebates, China’s exports will experience a big fall in the second half of 2007 and the whole year of 2008. This, of course, will play a role in reducing China’s trade surplus. Meanwhile, China’s employment will also be affected. Fan Gang, Director of National Economics Research Institute and a highly distinguished economist, said that the biggest victims of rapid appreciation of the renminbi would be the majority of rural workers in China. In the meantime, those on the other side of the Pacific will also feel the pinch.

The authors are associate professor at Capital University of Economics and Business and standing councilor of China Association of American Studies, respectively