U.S. Senate's Patience on China's Yuan Policy May Be Growing Thin

Five senators, including U.S. Sen. Charles Schumer (D-N.Y.) and U.S. Senator Lindsey Graham (R-S.C.), introduced legislation Tuesday that would make it easier for the United States to declare currency misalignments and take corrective action. The yuan is presently pegged at roughly 6.83 yuan to the dollar.

Foreign manufacturers, including many from the United States, argue that China's fixed-yuan policy gives China's manufacturers an unnatural, unfair competitive advantage, as the currency peg keeps China's exports cheaper than what they would be under a market-based currency system.

China counters that the fixed yuan is necessary to protect its embryonic, vulnerable economy, and that the world benefits from China's exported cheaper goods.

Monetary/Economic Analysis: As expected, there's a growing sense of exasperation in the Senate over China's intransigence regarding the yuan, as hundreds of thousands of jobs flow into China, due to export gains stemming from the currency peg. Even so, the Obama administration faces a daunting problem. New York Times (NYT) Columnist Paul Krugman argues the U.S. can get tough with China without fearing a Sino asset dump, as there are plenty of investors who will take China's place. Krugman also argues the asset dump could end up benefiting the U.S., as the likely weaker dollar would make U.S. exports cheaper.

Even so, a mass China sale of U.S. assets would roil financial markets, exactly what the Obama administration has been working to avoid for the past 15 months. It is a tough call, but it's time for a temporary, 25% surcharge on imports from China, as Krugman recommends.