The US owes China more than $200 billion because of the large trade deficit, currently at $114 billion annually. China manufactures goods cheaply and exports those products to the US where consumers can't get enough of them. But the US can't export an equal amount of goods back and has to borrow from China to cover the shortfall.
Those who favor a policy of China increasing the value of the yuan believe that it would cause the price of goods manufactured in China to go up, encouraging US consumers to purchase fewer goods from that country and thus reduce the trade imbalance.
One big fear more hysteria than reality pushed by some China bashers, especially in the Bush administration, is that if the trade imbalance isn't reduced, China will use this leverage to manipulate US policies, perhaps even project its nefarious Communist goals onto this country.
If implemented, such a policy might impact the US economy in some small ways. But because it doesn't take into account the much more serious issue of the long-term dismantling of the US manufacturing sector, a problem that has been developing and gaining momentum much longer than China has had it current trade relationship with the US, it is basically flawed.
This fact was pointed out in a recent opinion piece in the People's Daily, a national newspaper in China. The author of this piece argues that the exchange rate issue is an easy target, but that "structural adjustment of the [US] economy is also necessary."
The international trade triangle creates a situation in which, because so much cash is being pumped into the US, it can keep its interest rates artificially low. In turn, countries like China get caught up in trade relationship with the US where in exchange for goods and debt, they get "junk dollars," or the increasingly weakening purchasing power of the dollar. Implied is that, rather than US debt, China might have other priorities (domestic agricultural subsidies, social welfare, internal development) on which to spend its profits from selling goods in the US market.
This set of circumstances has convinced many countries that are not reliant on the export of cheap commodities to the US, like Venezuela, Cuba and Iran, to trade "junk dollars" for euros, tying themselves more closely to the European market and earning the ire of the Bush administration. But China isn't in a position to make the euro leap. So, in its view, higher US interest rates would be beneficial.
China's refusal to raise the value of the yuan (or to set a floating exchange rate) may be related to the refusal of the US to bump up its own interest rates to a level that makes holding US debt more profitable. Of course, the Bush administration wants to keep interest rates as low as possible to prevent the economy from sliding back into recession, especially before a national election that already may see the ruling Republican Party lose power in Congress.
Instead, the administration has opted for malicious attacks on China, inventing military hostility and writing long reports on the "China threat."
What is the real problem with the US economy?
Indeed, presidential adviser Greg Mankiw earned unwanted attention during the 2004 election campaign when he described outsourcing as "a plus for the economy." Mankiw, of course, was not saying anything strange or at odds with the economic orthodox play book of his boss and his supporters. Of course, what Mankiw and others mean is that some US investors who support their policies earn higher rates of return on the investments when those firms relocate all or portions of their operations to countries in Latin America or Asia.
Bush and the Republicans are completely unmoved by the fact that 3 million manufacturing jobs have vanished since 2001. Instead, they celebrate the decline of the union movement that has kept US capitalists honest on pay and benefits for tens of millions of working families. When they talk about the economy creating jobs, they mean low-wage, low-skill jobs that have seen a steadily eroded standard of living for millions of working families.