It is hard to understate the historical importance of international trade.  The Silk Road, a series of interconnected trade routes that traced back to several thousand years before Christ, was a critical factor in the formation of the great civilizations of Persia and Rome. 

Had King Ferdinand and Queen Isabella not sought to establish a more effective trade route to the West Indies, the discovery and exploration of North and South America may have forever been changed.

International trade still delivers the goods today: an increasingly global economy means more opportunities to alleviate poverty in the worst areas of the world while simultaneously allowing consumers greater choice over the products they buy and the prices they pay for them.  According to the WTO, global merchandise exports alone have increased nearly 50 percent since 2001 to over $12 trillion dollars (2007).  The United States is largely considered to be the engine of the global economy, despite the fact that the European Union and China are increasing their ability to carry the load.

The reasons for international trade are obvious.  No nation is able to remain independent of the global marketplace and prosper.  Countries must access natural resources to fuel their own economies and multinational corporations integrate supply chains among various locations to maximize profit.  Thanks to globalization and the Internet, many Americans are now playing Monday morning economist.  The issue garnering the most attention is America’s $300 billion commercial relationship with China: is it costing Americans jobs? How much does it contribute to rising income inequalities within American society?  Does an economically strong China threaten U.S. security interests?

The China-U.S. Strategic Economic Dialogue, held on May 22, 2007 in Washington D.C., sought to give U.S. officials a context to respond to its citizens’ apprehension.  The purpose of the Dialogue was to produce consensus between the two trade giants and develop a framework to address the perceived undervaluation of the yuan (you-ahn), China's currency.  By undervaluing the yuan, American politicians believe, China is contributing to the rise in the U.S. deficit.  China's trade surplus with the U.S. increased to $233 billion in 2006, amounting to nearly 30 percent of America's total deficit.  In addition to having the fourth largest GDP in nominal terms, China exports to America (and many other places as well) because the yuan's value allows for low labor, manufacturing and production costs that are ultimately passed on to the American consumer.  

With the housing market looking grim and continually increasing energy costs on the immediate horizon, Americans should loathe the idea of an appreciation of the yuan.  Why? If the yuan strengthens against the dollar, labor and production costs would (theoretically) increase.  This cost, and others along the supply chain as a result of revaluation, would be passed on to American consumers at places like Wal-Mart, Target, and anywhere else that the words "Made in China" are found.  Truthfully, Americans have no one to blame for their deficit woes but themselves.  If the only goal is to eliminate the deficit, U.S. economic policy should encourage saving rather than spending.  In many ways, China is no more to blame for America's deficit than McDonald's is for causing people to be overweight.

Indeed, as The Economist contends, it is China that actually stands to benefit from a revaluation (2007).  As the economy grows on a magnificent scale, it risks overheating.  Overheating occurs when aggregate supply is unable to keep up with growing aggregate demand.  China’s overheating concerns are unique: “China’s widening current-account surplus and its strong investment imply excess supply…the real concern is that excess liquidity, as a result of the surge in foreign-exchange reserves and low interest rates, is flooding into shares” (emphasis added, 75).  Too much liquidity can lead to asset markets that are prone to volatility.  A stronger yuan would help control the flow of money between assets and more effectively stabilize the Chinese economy.  More balanced growth prevents wild financial swings that are not only liable to affect China but increasingly the global economy at large.

America, therefore, is right about the yuan for the wrong reasons.  Suppose China does revalue.  If multinationals’ supply chain processes via China become too expensive as a result of the appreciation, firms may opt to shift production to areas where profit can be maximized.  The most logical choices here are Southeast Asian nations like Vietnam, Indonesia, and the Philippines.  Benefiting from increased investment and domestic production, GDP would have an opportunity to rise, and trade with America would increase as a result.  Accepting that American consumers are bound to continue spending if southeast Asian nations are able to fill the void left by China's revaluation, the account deficit will never truly even up.  However, given that the current rhetoric of American politicians isn’t even directed at a real, sustainable solution, this seems to be a foregone conclusion.  Looking past the political posturing, an interesting strategic benefit would result from the U.S. convincing the Chinese to revalue:  the increased economic empowerment of China’s neighbors creates the foundation for an effective soft-power counterweight to the growing Chinese regime.  As geopolitical tensions mount in the Taiwan Strait, China’s neighbors would be foolish to agitate the American consumer machine that helps sustain them.  This idea fits with the current administration's skepticism of a rising China and the need for America to address it.

And perhaps it is right for the U.S. to plan for a troublesome China in such a roundabout way.  However, Southeast Asian nations that fill the cheap export need are no more interested in upsetting their neighbor to the north than they are the U.S.  Their strategic alliances would likely remain the same as they are today.   Further, American policy may serve to contribute to a less-than-peaceful rise of and distraction to the Chinese, preventing them from making good on their peaceful and harmonious claims.  Instead, diplomats from both sides should engage in thorough conversations about the causes and effects of international trade between their countries.  U.S. deficit reduction is but one part of the global economic picture.  Squabbling over unfair trading practices and manipulating currency values will do very little in the way of formulating a more long-term, mutually beneficial solution not just for the American and Chinese economies but also for the world – and globalization – at large.                

Lost in Translation.  (2007, May 19-25th).  The Economist.  73-75.  

The World Trade Organization. (2007).  Time Series: Total Global Merchandise Exports for 2001 and 2006.  Retrieved May 23, 2007 from http://stat.wto.org/StatisticalProgram/WSDBViewData.aspx?Language=E