On May 10, the United States administration said it would not accuse China of currency manipulation. This announcement provoked an outcry from American manufacturers, who claim that China is artificially undervaluing its currency, the yuan, by up to 40 percent, to gain unfair trade advantages over American competitors.

Keeping the yuan undervalued compared to the dollar makes Chinese manufactured goods relatively cheaper than U.S.-produced goods. Therefore, manufacturers argue, people are more likely to purchase less expensive products made in China. They contend that this has led in large part to the loss of nearly 3 million manufacturing jobs over the past five years as businesses have closed up shop or moved overseas to open factories in lower-cost China.

Last year’s $202 billion record trade deficit with China shows Americans certainly are purchasing more Chinese products. Expressed another way, last year America lost $202 billion in trade with China. The lack of response on the part of the current administration in the face of such dramatic job and trade losses has stirred much emotion and threats by union leaders and lawmakers alike.

“Bush and the Treasury Department have proven that, when it comes to China, they are all bark and no bite,” said Richard Trumka, secretary-treasurer of the afl-cio (American Federation of Labor-Congress of Industrial Unions). “With no meaningful action coming from Washington, China will continue to undervalue the yuan” (Business Week,May 10).

“We’re tired of making excuses … to people in my state who are being devastated by currency manipulation,” said Sen. Lindsey Graham, S.C., who is co-sponsoring a bill that would impose a 27.5 percent tariff on all Chinese-made goods coming into the United States as retaliation for Chinese currency manipulation.

Auggie Tantillo, executive director of a U.S. textile and clothing company coalition, says the lack of governmental action shows that the U.S. has been reduced to nothing more than “a paper tiger unwilling to stand up for its domestic industrial sector.”

So, the big question emerges: Why won’t the Bush administration do anything about China’s currency manipulation if it is destroying millions of jobs and sucking billions of dollars out of the country?

Stratfor says the reason the U.S. Department of the Treasury did not accuse China of currency manipulation is this: Although the dollar remains strong compared to the yuan, it has plunged against other world currencies. This has improved the U.S.’s overall trading position and thus taken the spotlight off China somewhat: The administration is simply “not nearly as concerned about the currency issue as it has been previously” (May 11).

As Stratfor says, the dollar’s recent fall in value (7 percent against the euro and 5 percent against the Japanese yen so far this year) should help American manufacturers become more competitive in relation to foreign rivals whose currencies have appreciated relative to the U.S. dollar, and has taken some pressure off the Bush administration.

However, recent dollar weakness hasn’t done much to help American exporters reduce the competition gap with the Chinese. This is because even though China no longer officially pegs its currency to the dollar, it does artificially manage its currency to keep it from appreciating very much or too quickly against the dollar. The Chinese yuan has appreciated less than 1 percent against the dollar so far this year.

Consequently, as the dollar has fallen against currencies like the euro and yen, so has the Chinese yuan. In other words, the falling dollar has helped the trading position of the Chinese also, because it makes their products cheaper in relation to their non-U.S. trade partners. As a result, there is less incentive for China to allow the yuan’s value to increase rapidly.

There are several other reasons why the current administration is not putting more pressure on the Chinese to revalue their currency more quickly.

What would happen if, say, China did announce that it would allow its currency to appreciate 40 percent against the U.S. dollar?

To let the Chinese yuan appreciate against the dollar, China would have to buy fewer or stop buying U.S. Treasuries. Since China is one of the largest buyers of U.S. Treasuries, the resulting lack of demand would cause the dollar to lose value.

Yuan appreciation could lead to two possible scenarios, both of which would probably be bad for America’s economy.

First, it could lead to import price inflation. Products at Wal-Mart or similar businesses that import most of their goods from overseas would theoretically become instantaneously more expensive—probably not 40 percent more expensive, since foreign manufacturers could “eat” some price increases by cutting their own costs and profit margins, but costs of imported products within the U.S. would go up. While hurting consumers, it would theoretically help American manufacturers whose products would become more cost competitive with foreign-made goods.

Also, a higher yuan could lead to higher oil prices for Americans, creating another inflationary pressure. The Chinese sale of dollars could cause the dollar to drop against many currencies. As the dollar loses international purchasing power, oil-producing nations would likely demand more dollars per barrel of oil. Since the U.S. is so dependant on imported oil, the cost of every oil-based product from plastics to gasoline would go up with a rising oil price.

The converse would be true for China. A rising Chinese currency would make oil and other commodities less expensive for the 1.3 billion rapidly industrializing Chinese. With oil markets as tight as they are, any increase in demand from China could make oil more expensive for the rest of the world. A rising Chinese currency would also make imports of other commodities like coal, steel, copper and gold relatively less expensive for the Chinese, possibly further stimulating their demand and increasing commodity prices for America and the rest of the world.

Second, any announcement by the Chinese that they were going to stop buying U.S. Treasuries—or worse, sell their current holdings (China is the second largest foreign holder of U.S Treasuries)—could lead to a run on the dollar. Other major dollar-holding nations, not wanting to be caught holding massive depreciating dollar reserves, would sell their dollars—creating a snowball effect and further adding downward pressure to the greenback and upward inflationary pressure in the U.S.

If dollar sales or inflation became too pronounced, the U.S. Federal Reserve Bank might be forced to significantly hike interest rates to defend the dollar and attract U.S. Treasury buyers. Higher interest rates would be detrimental to an economy deeply reliant on borrowing to finance consumer spending.

So, if forcing a yuan currency appreciation isn’t a good alternative, what about imposing tariffs on Chinese imports?

Increased tariffs would also lead to price increases of imported goods. America no longer produces many of the products that domestic consumers use every day. Until domestic manufacturing could produce those goods again, consumers would be stuck paying higher import prices.

But perhaps the greater risk in imposing tariffs is the possibility of igniting a trade war. Even though America possesses the world’s largest economy, the U.S. owes China hundreds of billions of dollars. America’s economic situation is on shaky ground, so it is not clear who would be hurt the most in a trade war with China.

Leading economic analysts in London liken the U.S.’s current economic condition to that preceding the “Black Monday” crash of 1987—the day stock markets crashed and the Dow Jones lost more than 20 percent of its value in just hours. “A report by Barclays Capital says the run-up to the 1987 crash was characterised by a widening U.S. current-account deficit, weak dollar, fears of rising inflation, a fading boom in American house prices, and the appointment of a new chairman of the Federal Reserve Board.

“All have been happening in recent months,” noted the Sunday Times, “with market nerves on edge last week over fears of higher inflation and a tumbling dollar, and the perception of mixed messages on interest rates from Ben Bernanke, the new Fed chairman” (May 21; emphasis ours).

If currency revaluation and tariffs are both poor options for the U.S. to save American manufacturers, what is the alternative?

The government seems to think the alternative is the status quo. By doing nothing, the government is signaling to manufacturers that they are on their own to adjust, innovate or fold. This way, the administration is seeking to keep the façade of a healthy economic model in place. Thus the game with China will continue: Americans will buy cheap Chinese imports, and the Chinese will use their profits to buy U.S. Treasuries, which finance America’s huge deficits, support the dollar, keep interest rates low and keep Americans spending money—on cheaper Chinese imports.

Unfortunately, this choice also means that domestic businesses, especially those in direct rivalry with Chinese companies, will continue to face pressure. Consequently, the pool of manufacturing jobs in America will only keep drying up.

It also means that the U.S.’s creditors, particularly China, will continue to accumulate and control more of America’s debt—and that is what is at the core of America’s problems. America has become a debtor nation that relies on the kindness of foreign nations to support the dollar and finance the spending and standard of living U.S. citizens demand. As America accumulates debt overseas, it transfers its power over the dollar as well. Increasingly, countries like China and Japan, to which America owes billions of dollars, will be able to influence the value of the dollar.

As congressman Ron Paul says, “Our federal government’s huge debt and voracious appetite for deficit spending make our economy dependent on the actions of foreign governments and central bankers. Yet few Americans realize the extent to which their own government has sold out American sovereignty by borrowing money overseas.

“The consequences of a rapidly declining dollar are not yet fully understood by the American public. The long-term significance has not sunk in, but when it does there will be political hell to pay in Washington. Our relative wealth as a nation is measured in dollars, and the steady erosion of the value of those dollars means we will all be poorer in the future. … This is the reality facing Americans today …” (Texas Straight Talk,May 15).

Sadly, people, especially most of our leaders, have forgotten this proverb: “The rich rules over the poor, and the borrower is servant to the lender.” The fate of the dollar and the U.S. manufacturing industry seems to be in the hands of our debt holders—and if things don’t change, neither will survive much longer.

To find out exactly what must change, write for a free copy of the book The United States and Britain in Prophecy.