China's record trade surpluses with the United States are not pleasing to the US Congress or to the many China hawks on Capitol Hill. There has been little movement in the yuan-dollar exchange rate since it was revalued in July last year. Pressure is mounting to bring the Schumer-Graham bill - which would impose duties on Chinese imports - to the floor for a vote in the autumn. Prohibitive tariffs, however, will not correct the trade imbalance.
Rather than going down the path of destructive protectionism, the US should get its own house in order by reducing the size and scope of government and by reaffirming its commitment to economic liberalism. Indeed, if China is not to become the inevitable enemy that some on Capitol Hill envision, the US must continue its policy of engagement.
Financial liberalisation will take time, and Beijing will move at its own pace. The US should be patient and realistic. Most of the costs of China's undervalued currency are borne by the Chinese people. Placing prohibitively high tariffs on Chinese goods until the yuan-dollar rate is allowed to appreciate substantially is not a realistic option. It would unjustly tax American consumers, not correct the overall US current-account deficit (or even our bilateral trade deficit with China), and slow liberalisation.
Adjustment requires that Beijing not only allow greater flexibility in the exchange rate, but also allow the Chinese people to freely convert the yuan into whatever currencies or assets they choose. Capital freedom is an important human right, and would help undermine the Communist Party's monopoly on power by strengthening private property rights.
A more liberal international economic order is a more flexible one based on market-determined prices, sound money and the rule of law. We should help China move in that direction - not by threats, but by example. The US government should begin by reducing its excessive spending, and removing onerous taxes on saving and investment. An orderly adjustment based on market-liberal principles would help ease the costs to the global economy and to the US in particular.
Keeping our markets open sends an important signal to the rest of the world, and getting our fiscal house in order would show that we mean business. Reverting to protectionism, on the other hand, would have a negative impact on the global financial system.