Firstly, yes, of course China manipulates its currency (James Fallows cites the problem more as one of China's management of RMB's value than its outright manipulation. Manipulation is, indeed, quite a loaded word and politically incorrect in financial crises), but arguably so do Singapore, Saudi Arabia, Argentina and any nation that either pegs its currency, maintains a tight trading band, or oversees a "managed float" system. Even Hong Kong, consistently ranked as the world's freest economy by the Heritage Foundation, manipulates its currency. It has to maintain its links to the U.S. dollar. So for Geithner to pinpoint China alone is not only unfair, it's irresponsible (apparently Geithner took the language from Obama's campaign website without asking anyone whether campaign slogans were now governmental policy!).
Secondly, the U.S. needs China - economically and otherwise. You might recall that China has been the main buyer of U.S. Treasury notes. If there is to be any serious headway made on environmental or climate-change issues, too, the United States again needs China. Anyone who knows anything about anything about this issue understands the thoroughgoing importance of having Beijing on board. This is largely why the appointment of Chu (really the only other thing the Obama administration has done vis-à-vis U.S- China relations thus far - more on that in a minute) was so important. Of course the fact that Chu is the son of Chinese immigrants contributes greatly to the significance of the appointment (it was largely celebrated in China), but more important is the work he has done in brokering U.S-China relations in the area of climate change and related issues.
That said, the United States cannot afford blunders when it comes to its relations with China; the stakes are too high. And yet the first thing America does under the new administration is blunder. This is China's first impression of the 'new' United States. During his campaign Obama (to my knowledge) did little in the way of outlining a China policy, save but commenting that he would not purchase lead-poisoned toys for his children. With the exception of Chu's appointment and now Geithner's flap of the mouth, the Chinese have little idea as to what to expect under Obama. So much so that Obama allegedly placed a call to President Hu in an attempt to calm the waters and assure him that Geithner's misspeak will not be characteristic of U.S-China relations under his administration. I sure hope not.
Adding insult to injury, the exchange rate is currently not the most important aspect of U.S-China relations, even given the financial crisis. While Geithner may not yet understand or recall this (maybe someone has told him by now?), the Chinese do. And they have told him (and Obama) exactly where they can put their yuan views.
The last thing the United States should want right now is a trade war. Especially not with China. Especially.
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