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. For its part, China can help restore global balances by moving towards a more flexible exchange-rate regime and liberalising capital outflows so that there will be less pressure by the People's Bank of China to accumulate foreign reserves. China needs to move towards a market-liberal order, which means it needs a rule of law that protects people and property. As Wu Jinglian , one of China's leading reformers, recently said: 'If we don't establish [a] fair rule of law and don't have clear protection of property rights, then this market economy will become chaotic and corrupt and inefficient.' Congress can best foster sound US-China relations by not treating China as an inevitable enemy and by taking the opportunity to capitalise on China's emergence as a market economy, albeit a 'socialist market economy'. In particular, US policymakers should: treat China as a normal rising power, not as a probable adversary; continue to liberalise US-China relations and hold China to its commitments under the World Trade Organisation; and recognise that advancing economic freedom in China has had positive effects on civil society and personal freedom for the Chinese people. Adherence to the principles of a liberal international order - as opposed to muddling that policy conception by threatening to adopt protectionist measures - should be the primary objective of US policy. James Dorn is a China specialist at the Cato Institute. This article is based on his recent testimony before the US-China Economic and Security Review Commission
