U.S.-China Currency War: Should America Fight Back by Defaulting?

A little less handshaking, a little more action?

China-U.S. relations have dominated this week's headlines with Hu Jintao's official state visit to America. And there is much to talk about with respect to what is arguably the world's most important bilateral relationship.

'Bleeding-hearts' types will no doubt want to focus on human rights issues, such as China's not so secret effort to wipeout Tibetan civilization and the ongoing imprisonment of China's recent Nobel Peace Prize winner, Liu Xiaobo.

As the NY Times opinion page put it, "how can one Nobel Peace Prize laureate be silent when meeting the man who imprisons the next?"

And those concerned with the military balance of power can point to concerns about Chinese espionage, secret development of sophisticated weaponry like a Chinese stealth fighter, and China's navy contesting free navigation in the South Sea.

The Renminbi Runaround

There is also the matter of U.S.-China economic relations. As far as the U.S. is concerned, the big one is the exchange rate of China's currency, the renminbi (yuan). It is widely agreed that China's currency is undervalued by as much as 20-40%, providing China with an unfair trade advantage. Much has been written about this issue previously here.

Former Secretary of State and and National Security Advisor, Henry Kissinger, appeared on Charlie Rose this week to discuss relations with China. Not surprisingly, Kissinger argued for a diplomatic solution to the renminbi. While acknowledging that he is not economist, Kissinger believes there should be some way to bring the Chinese around on revaluing the renminbi by offering something in return. My question is hasn't the U.S. already tried that ad nauseam?

Throughout modern history the world's trade and currency order has always followed a set of explicit and implicit 'rules of the game', so to speak. Over the last two decades China has benefitted significantly from first having access to the world's markets and later gaining entrance into the World Trade Organization. While WTO rules do not cover exchange rate manipulation, one of the hallmarks of our current semi-free trade system is floating exchange rates. China exercises heavy control over its exchange rates in a manner completely unlike other major trading powers, such as the U.S.

The key question, put simply, can be expressed as follows: why is there one set of currency rules for China, and another set for everyone else?

Continue reading the full article published on SeekingAlpha here.