China’s fixed exchange rate against the US dollar continues to be blamed by a large majority of US lawmakers for helping to create global economic imbalances and stealing jobs from US industries, notably manufacturing. (FT)

The rhetoric has never been this heated before, but that doesn’t necessarily mean that D.C. is actually going to do anything. Since I really don’t like any of the options floated thus far, I see that as a good thing. But what happened to all the tough talk?

A House of Representatives ways and means committee hearing last week examined the tools at Washington’s disposal to lever the renminbi off its peg. They were less drastic than earlier plans to simply slap an across-the-board import tariff on Chinese goods to compensate for the alleged undervaluation – or a less radical version, to incorporate estimates of currency undervaluation in the calculation of anti-subsidy duties imposed on Chinese imports. But none was free of either legal or political problems, or invulnerable to the charge it would end up in impotent jawboning.

The tariff/countervailing duty option is off the table, and was not part of the bill Senator Schumer unveiled recently. That was the toughest, and most problematic suggestion put forward in recent years for several reasons, one of which was that the legality of the measure was in serious doubt.

So what’s left? The Schumer bill and suggestions by various experts, such as Fred Bergsten (cited in the FT article), include the following:

• Label China a currency manipulator in the Treasury Report, due on April 15. I always bet against this happening (never been wrong), but there’s always a first time. The question is whether this would actually do anything substantive. With one or two relatively minor exceptions, I don’t think this obliges the U.S. government to do anything besides talk to China about the problem.
• Go to the IMF. Many people have said that the best way to fix the RMB problem is through multilateral negotiations. I agree, but also think that this will be practically impossible.
• File a case with the WTO. Best case scenario: U.S. wins case after several years then goes through several more years of enforcement procedure, by which time RMB value has increased significantly (and China has gotten really pissed off). Worst case scenario: U.S. loses case, China is pissed off and digs in its heels further.

So in addition to those crappy options, what else can the U.S. do?

1. Continue with bilateral negotiations. These haven’t been successful since they started (2003?). No reason to believe they will suddenly find traction in the near future.

2. Do nothing and hope that the situation fixes itself eventually. It will fix itself eventually, but the U.S. cannot be seen as doing nothing. This would be political (domestic U.S.) suicide.

Not the best set of options with which to choose from, huh? Unfortunately, I don’t see any magic bullets here, and I haven’t heard any experts out there come up with a nifty new idea.

Expect more rhetoric, chest thumping, and political posturing. More bilateral negotiations will happen. But in the end, I suspect that China will do things on their own timetable, influenced to a small degree by outside pressure (they will never admit to this of course), but only by a small amount.