By Cedric Welsch – The US seems to be getting serious about pushing the Yuan up such that the indirect export subsidy that an artificially undervalued Yuan offers is negated. An undervalued Yuan effectively makes Chinese goods cheaper compared to those manufactured elsewhere. Thus the undervalued Yuan hits industry in other parts of the world and it is effectively being transferred to China, making it’s the world’s factory.

This may have been an acceptable situation, when the economic scenario in the world and the US was good. The US and European nations were happy as polluting industries had moved to another part of the world and their currencies could buy goods cheaper. However, it appears that with the US not managing to pull itself out of the weak economic cycle it has got stuck in, it wants to push up the Yuan up so that the US industry becomes more competitive and can start generating employment and get itself out of the economic mess it is in.

The Bill that has been passed by the US House of Representatives treats the Chinese exchange rate mechanism as a substitute to providing an export subsidy. However the Bill yet needs to get the approval of the US Senate and the President’s signature, before it becomes a law. While the US has been expressive over this issue for a long time and denounced China’s exchange rate policy, it’s the first time that a serious step is being taken in the direction. The Bill has provisions for imposition of extra duties on Chinese goods imported into the US to counter the effect of the alleged export subsidy being provided by the Chinese government.

Meanwhile, the Chinese are up in arms against the US move and have termed it an anti WTO step. China has claimed that while it has a trade surplus with the US, it runs deficits with several Asian economies and such a step by the US is uncalled for. Partly the move is politically motivated, with US midterm elections due in November. China has long been blamed for the high unemployment rate in the US arising out of the undervalued Yuan leading to transference of manufacturing capacity to China.

This move by the US could lead to a full blown trade war between the two nations, which already seemed to have begun when the US imposed extra duties on steel pipe imports from China. In retaliation, China had imposed extra duties on imports of Chicken from the US. There was some hope earlier in June this year, when China pledged to move to a more flexible exchange rate mechanism. However, since then, the Yuan appreciated barely by 2%.

Critics in the US believe that the Yuan is undervalued by nearly 40%. US is China’s biggest export customer and an upward revaluation of the Yuan vis-à-vis the US dollar will lead to Chinese exports to the US becoming more expensive. This will result in a reduction in demand for Chinese exports to the US and can lead to a slowdown in the Chinese rate of growth. Thus, it appears that China will do all that it can to protect its position and resist moves that can lead to any sudden or major appreciation in the Yuan.

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