United States Senators Charles Schumer and Lindsey Graham dropped a contentious bill that threatened to slam high tariffs on China's exports to the US unless China significantly raised the value of its currency.

Despite surging protectionist sentiment in the US, the country's politicians did not go o far as to pass a law that would strain bilateral trade relations as well as violate the rules of the World Trade Organization.

Earlier this month, Chinese Vice Premier Wu Yi and US Treasury Secretary Henry Paulson jointly initiated the Sino-US Strategic Economic Dialogue, a far more constructive move in tackling disputes and differences over economic issues between the two sides than the senators' confrontational proposal.

Browbeating could actually be counter-productive.

As important trading partners for each other, the US and China are indeed in need of more consultations on economic matters.

Talks provide opportunities to understand each other's situations and real intentions.
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Chinese policymakers have made it clear that they want the yuan's exchange rates to be more flexible. For a trading giant and a country aiming for a more mature market economy, allowing market forces to work as the key determinant for its exchange rate is certainly the ultimate goal.

The country has also been moving in that direction.

Since the foreign exchange reform in July 2005, the yuan's rate to the US dollar has appreciated by more than 4 percent. Financial departments have also been busy introducing and designing financial instruments for a more sophisticated financial market, which is a prerequisite for a liberalized currency.

But the country simply cannot afford to be radical in this regard.

Toward the end of their trip to China in March, Schumer and Graham said their talks with senior Chinese officials, including Wu, resulted in their better understanding of China's true intentions.

However, while announcing their decision to abandon the bill, they said they would develop a new bill to press some countries for currency reform. China is likely to remain a target of that bill.

It is still too early to know what the new bill will be like, but the sponsors should be aware that currency reforms simply cannot be conducted with a drastic approach.

In addition, problems in the US, such as the uncompetitive nature of its textile industry, cannot be solved by reforms in other countries.

As some US businesspeople pointed out, the most likely result of a dramatic renminbi appreciation, if it does happen, is the higher price of many consumer goods and nothing else.

(China Daily September 30, 2006)