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There's More than Trade Involved in China's Dollar Peg

Cosmetic or substantive?

12:00 AM, Apr 10, 2010 • By IRWIN M. STELZER
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Obama would like nothing better than to make a tour of job creating Chinese investments in key states by the time he stands for reelection in 2012. And the Chinese government is under pressure from its own companies to allow them to enter the lucrative U.S. market, as other American trading partners such as Japan and Germany (think Toyota, BMW and Mercedes) have successfully done.

Of course, the dollar peg will be on the invisible agenda. But my guess is that it is already a solved problem. The Chinese will publicly follow the line taken by China’s premier, Wen Jiabao, who denies the yuan is undervalued and insists that depreciating the dollar while pressuring other countries to appreciate their currencies in order to increase exports “is protectionism,” which he presumably opposes. That’s the visible part. The part below the surface will involve an agreement by Hu to allow the yuan to appreciate gradually by a few percentage points in order to strengthen Obama’s hand with those calling for more drastic measures, and to satisfy his own central bankers.

In the end, all of this is more cosmetic than substantive. If Chinese imports become a bit more expensive in the U.S., but only a bit, the effect on trade with China will be miniscule, and the effect on America’s trade balance even less, as consumers switch to the low-cost products of Central American and other countries. But that matters less to President Obama than adding what he can represent as another victory to his health care triumph and the arms control deal with Russia.

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