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The trade deficit and the dollar dominance
Latest Updated by 2006-05-15 09:51:30

Fang Ming, a senior analyst on the global financial market from Bank of China, argues that the US maneuvers the issue of trade deficit to bargain for the rise of value of the Chinese currency. Friday's People's Daily carries his article.

The US Treasury Department did not cite China as a currency manipulator in its report to the Congress on International Economic and Exchange Rate Policies on May 10. However, it accused China of making too slow reform on the RMB exchange rate regime and vowed to "actively and frankly" push China towards faster progress on exchange rate flexibility.

Some senators even threaten to put the China punitive trade bill to vote which had been delayed if China failed to have its currency more flexible by September 30 this year.

The Treasury Department will submit another report to the Congress six months later.

Fang Ming analyses that it is not the real intention of the US to balance its trade with China by imposing pressures on RMB. In fact, its trade deficit with China is not so big if exports by American businesses in China are not counted. And the US will even enjoy a surplus if it loosens its control on its hi-tech exports to China.

He says the US real intention is to coerce into a stronger yuan by cashing in on the economic imbalance and China's dependence on the US economy and dollar assets.

In fact, the sharp devaluation of the US dollars against currencies of major economies since 2002 did not ease or erase the US trade deficit with any of them.

In a fair trade, importers get commodities they need while exporters gains income. In the case of deficit, there are still benefits of commodities for the side of the deficit.

Developing countries or regions invest their foreign exchange reserves earned from their low priced exports into the US bonds market. In this way, they give their capital benefits and in turn complete the dynamic economic and financial balance globally.

Therefore, the US takes advantage of the trade deficit and the dollar dominance to acquire both the commodity benefit and capital benefit from its developing trade partners. It is the self-adjustment of the powerful US economy and finance.

The trade deficit, which is resulted from the strong domestic demand of the US for imports, has always been used by the US to bargain with the international community. And the tactic has been working so far. The Plaza Accord in 1985 appreciated the yen and the dollar was made weaker again from 2002.

The Bretton Woods system made dollar equivalent to gold. In case of gold shortage, the US has its dollar value downgraded. The Jamaica Agreement in 1976 legalized the floating rate system and demonetized gold as a currency. Although the dollar is not pegged with gold, the dollar's status as the world currency has been consolidated since then.

China is improving its managed flexible exchange rate system. It is not conducive to the China-US trade relations, nor is it conducive to the US national interest, to force China to take concessions by intimidating for even sanctions. The US should seek objective and rational judgment on this issue.

Editor: Yan

By: Source:People's Daily website
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