A big rise in the value of the yuan would lift prices for millions of consumers who buy Chinese goods. By Jeremy J. Siegel, Contributing Columnist February 28, 2007 Uncle Sam's top economic officials, including Fed chief Ben Bernanke and Treasury Secretary Henry Paulson, recently sat down with their Chinese counterparts for the first of a series of meetings to encourage "fair trade." This is a euphemism for, among other things, limiting our soaring trade deficit by coaxing China to move faster on revaluing its currency, the yuan.A yuaning gap China is now our second-largest trading partner, after Canada. Trade between the U.S. and China soared to some $281 billion in 2006, a 20% increase over the previous year. But our annual trade deficit with China is $194 billion, more than twice the deficit with any other country. The U.S. wants China to cut its trade surplus by revaluing the yuan, making Chinese goods more expensive in dollar terms and U.S. goods more competitive in China. For years, China held its exchange rate at 8.2 yuan to the dollar. But in July of last year, it revalued the currency by 2.1% and "liberalized" the exchange rate by allowing small fluctuations. So far, the results are modest at best. The yuan has appreciated less than 6% against the dollar, far less than the 20% or so that many experts believe is necessary to bring the currency into more realistic alignment with the greenback. Uncle Sam wants the Chinese to revalue their currency significantly, not by taking the baby steps they've already taken. But I believe that such a policy would ultimately be detrimental to our interests. Advertisement A big rise in the value of the yuan would lift prices for millions of consumers who buy Chinese goods. These products account for almost 10% of all durable goods (think TV sets) and nondurable goods (think shirts) purchased in the U.S. A study by Dresdner Kleinwort Wasserstein estimates that low-cost Chinese imports have knocked almost a full percentage point off America's inflation rate in recent years. A 20% increase in China's currency would cause the prices of all goods sold in the U.S. to rise by as much as 2% (depending on how much of the increase Chinese manufacturers chose to pass along to U.S. consumers). A big currency revaluation would have consequences beyond its impact on import prices. If a revaluation does, in fact, decrease China's trade surplus with the U.S., then it must, by definition, reduce the amount of U.S. government securities that the Chinese government buys to cover this deficit. China has more than $330 billion worth of U.S. government bonds in its coffers, making it the second-largest holder, behind Japan. Fewer Chinese purchases of U.S. bonds could mean higher long-term interest rates here. Some maintain that the undervalued yuan hurts manufacturers trying to compete with Chinese imports, resulting in a loss of employment in U.S. industries. But although manufacturing jobs have been migrating to Asia for years, the trend has not hurt our overall employment picture. Over the past five years, the U.S. has created some ten million new jobs. That is more than double the number created in the European Union and ten times the number created in Japan. With a current unemployment rate of 4.5%, job creation is hardly a major worry for U.S. policymakers. Leaving well enough alone China, like many other Asian nations, follows a "mercantilist model" of economic trade. This model preaches that wealth and economic superiority are gained through increasing exports and hoarding gold and foreign reserves. The practice may not be great for Asian consumers, who pay more for goods than they might otherwise pay. But if the Chinese want to sell us cheap goods and use dollars to buy our government bonds, that's their business. My advice to Paulson and Bernanke when they next convene with the Chinese: Don't look a gift horse in the mouth. Columnist Jeremy J. Siegel is a professor at the University of Pennsylvania's Wharton School and author of Stocks for the Long Run and The Future for Investors.