In the past few weeks, Washington has upped the rhetoric concerning China and its currency. Coming at the time when there are a number of other sensitive issues facing the US-China relationship, it is not obvious to some of us why Congress is so excitable about this issue. With the biannual decision of the US Treasury on whether to name China as a currency “manipulator” due on April 15, it is far from clear that all this noise is helpful to anyone.
Indeed, from a macro-economic perspective, the timing could not seem more inappropriate. About four weeks ago, President Barack Obama announced a plan to double exports over the next five years. This is ambitious, but given the past weakness of the dollar and the strength of domestic demand in many big emerging countries, China included, the US has a chance of reaching its goal. So why go down a path of tit-for-tat retaliation that would take things in the opposite direction?
There are three fundamental issues that US policymakers should focus on: domestic demand in China, China's trade with the rest of the world, and exchange rates.