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Hu’s Chance

Chinese President Hu Jintao’s upcoming visit to the United States, postponed following hurricane Katrina, will be different from previous bilateral meetings. This time, the countries’ presidents will meet at a time of intensive American attention to the US-China trade balance and other economic issues, such as protection of intellectual property rights.

With China’s US trade surplus reaching $200 billion last year, American sentiment is growing to take strong measures. Some have suggested that the trade imbalance is related to China’s currency peg to the US dollar. A recent Congressional bill has called for imposing a 27.5% punitive tariff on Chinese imports.

In fact, the trade imbalance is more complicated than the currency issue per se. Globalization has strengthened the ability of capital to flow to wherever investment promises the highest returns; likewise, competitive manufactured products from low-wage economies will flow in the other direction. That is why China fascinates American investors, among others, and why US customers buy Chinese products.

To be sure, the exchange rate has an impact on investment and trade. But, even with China’s efforts to loosen the renminbi-dollar linkage, it is arguable whether revaluation could save American jobs or improve the US trade balance. After all, China is not alone: India and other competitive developing countries pose a similar challenge to the US.