Confrontation and an eventual showdown form the plotline of such classic western films as High Noon (1952) starring Gary Cooper and even of such light-hearted westerns as Shanghai Noon (2000) starring Jackie Chan and Owen Wilson. Now another showdown is brewing, this time between China and the United States over the exchange rate of the yuan. If it were made into a movie, Shanghai Noon 2, Jackie Chan's character Chon Wang and Owen Wilson's Roy O'Bannon would no longer be partners. Instead, they would be facing one another at high noon, just as Gary Cooper's Marshal Will Kane had to confront Frank Miller and his murderous gang.

The path to conflict in Shanghai Noon 2 begins with the U.S. trade deficit with China. It has been steadily mounting and reached $162 billion in 2004. That year, China exported $5.67 worth of goods to the United States for every $1 in American goods it bought.

U.S. officials put part of the blame for the deficit on China's policy of maintaining an artificially high exchange value of 8.3 yuan to the dollar at a time when the dollar weakened against most other currencies. Some experts say China should revalue the yuan by as much as 40% to reach a fair exchange rate. In 2005, U.S. Secretary of the Treasury John Snow called on Beijing to act "without delay," and Congress threatened to enact a 27.5% increase in the U.S. tariff on Chinese goods unless Beijing gave way.

Beijing initially called the U.S. position and threats "unacceptable."¹ Then in response to increasingly urgent U.S. demand, China relented, but just a bit. In July 2005, it agreed to devalue the yuan by 2%, far short of the 40% artificial difference with the U.S. dollar that some analysts claimed existed. China also agreed to let the yuan fluctuate further in the future, but again placed strict limits on how much. Most analysts agreed that the marginal devaluation would do little to change the U.S.-China trade pattern, and one of the legislators sponsoring the retaliatory tariff characterized the devaluation as a "baby step."²

The key argument for confronting China is that trade deficits cost Americans workers their jobs. "Until [the Chinese] start playing by the rules, our manufacturing industry will continue to bleed jobs," charged Senator Lindsey Graham (R-SC).³ Another argument for retaliating against China might be termed the "enough's enough" argument. It does not focus on one thing, but on the pattern of China allegedly not playing fairly by keeping the value of the yuan high, by continuing to allow the massive pirating of U.S. movies and software, and by a range of other practices that distort trade and investment.

Those who opposed sanctions on China make several counterarguments. One is that a major revaluing of the yuan or imposing sanctions on China will not save jobs. Former Federal Reserve Board Chairman Alan Greenspan told Congress that "few if any American jobs would be protected" because if the price of Chinese goods increased, the affected items would be imported from other low-cost countries rather than supplied by U.S. manufacturers. Opponents of retaliation against China also warn that substantially revaluing the yuan or increasing the tariff would harm most Americans. For instance, China produces about 90% of the world's toys, and the price of the nearly $18 billion in toys that the U.S. imports annually from China would increase, making birthdays, and other gift-giving occasions more expensive. It is also the case that China has used part of the inflow of U.S. currency to amass $230 billion in U.S. Treasury bonds (second only to Japan), thereby helping the U.S. government finance its budget deficit. A falling yuan would reduce bond purchases, the reduced demand would push up the interest rate the U.S. Treasury has to pay to sell its supply of bonds, and an increase in the Treasury rate would push up U.S. consumer interest rates on credit cards, mortgages, student loans, and other debt.

What Do You Think?
Imagine you are the U.S. senator from your state and that China has made only small adjustments in its international economic policy. Write the U.S. foreign economic policy script. Would you vote for or against a major tariff increase on Chinese goods?

In this photograph, a Bank of China teller is displaying 100 yuan currency notes with the face of Mao Zedong. The value of the yuan relative to the U.S. dollar is among the many economic issues causing tension between Washington and Beijing. If you were a U.S. policy maker, would you practice patient diplomacy to resolve the issues or would you favor sanctions to retaliate against China?