In May of 2009, US Congressmen Tim Ryan and Tim Murphy introduced the Currency Reform for Fair Trade Act (H.R. 2378). This served as a request for congressional legislation in response to perceived Chinese currency manipulation. A version of the House bill was passed recently and now, in the Senate, some senators have introduced a similar bill – S. 3134, the Currency Exchange Rate Oversight Reform Act of 2010.

With the past and current debate inside both nations, American politicians chose to use both legislative and political power to push China to further appreciate its currency.

The American argument is, with a stronger Chinese renminbi, US products will be more competitive in China and Chinese products will be less attractive to American consumers. Thus, the US trade deficit will be reduced, US workers will get more jobs, and an economic recovery will quickly follow. These objectives are admirable, but they are also idealistic, and it's questionable, at best, as to whether such legislation will fulfill the promises.

Several days ago, the House Ways and Means Committee held hearings to examine China's exchange rate policy. Although the arguments continue to focus on the renminbi undervaluation, the policy direction has now shifted towards a so-called free but fair trade focus.

Congressman Ryan argues that renminbi appreciation "can be a major stimulus and job creator for our country," while Murphy says "when countries, such as China, do not play by the rules…it is time for our government to step up and enforce those rules."

Both seem to be trying to explain why congress should enact their bill, but they have ignored facts and most of the evidence that shows an elevated renminbi exchange rate is not a panacea for a rapid and vigorous US economic recovery.

Warnings from experts and international organizations, such as the IMF, have provided strong evidence that renminbi appreciation will neither solve the US trade deficit issue, nor offer appreciable help with its economic recovery. It is also widely understood that this issue is one of the most convenient for politicians during the upcoming mid-term election.

US tariff history reveals that bad economic times seem to always produce bad political decisions. For example, a consequence of the Great Depression in the 1930s was the Smoot-Hawley Tariff Act. It is considered a significant failure in that it caused a wide range of foreign retaliatory measures and ended with a worsened world trade environment.

Even if China does not choose to retaliate at this stage, punitive congressional legislation against China will do little to improve the US economy. In fact, behind the renminbi exchange rate issue, the problem is American trade politics. US trade-policy expert I.M. Destler has said, "US law and practice maintained a set of 'trade remedies' designed to offer recourse to interests seriously injured by imports and to those up against what were considered 'unfair' foreign practices."

Much of the Currency Reform for Fair Trade Act 2009 simply reiterates the mechanisms that allow American industries and workers to seek remedies under current trade laws, and it applies a "fair" standard for currency manipulation. The fact is that the current American trade policy-making system does provide enormous institutional advantages to American interest groups in the face of international competition. Throughout the years, many American industries have been beneficiaries of this system. The recent case concerning the US-China tire safeguard dispute is a good example.

To a large extent, the US does not win disputed cases with facts or fair standards. Instead, the US enjoys a very competitive and effective institutional regime, which has been set up by the unique American political and legal regime. When the trade game is played at the institutional level, there is no nation that can beat the U.S.

Today, tariffs are no longer the tactic of choice. The better alternative is to build a stronger national institutional regime, which also serves as a powerful tool for creating superior world trade competitiveness. There is no doubt that the U.S. has been successful in making its trade policy-making system serve its powerful role in trade and the world economy. The Chinese government has a long way to go with respect to this endeavor and can learn a few good lessons from the American trade politics. There are sure to be many ups and downs in US-China trade relations. However, with some American-styled trade politics, China may very well level the playing field.

The U.S. should not exaggerate the potential role of renminbi appreciation in regard to its own economic recovery. By the same token, there is no single solution for the Chinese government to pursue to solve the issue. A single, one-time, appreciation won't solve all the problems the U.S. faces. Currently, there's too much counterproductive politics surrounding renminbi appreciation that threatens to poison future US-China trade relations.

The author is a columnist with China.org.cn. For more information please visit:

http://www.h5a3.com/opinion/node_7075405.htm