By Catherine Bugayong, Global Development Issue Analyst

The United States’ complaints about China have only progressively increased in volume since the economy crashed in 2008. At issue here is the exchange rate, which China holds “fixed” at 6.65 yuan to US$1.

Unlike the Chinese yuan, the US dollar and (other major trading currencies such as the euro and the Japanese yen) are on a “floating exchange rate regime:” the value of the US dollar automatically changes in reaction to demand and supply in markets. For China to place the yuan on a “fixed exchange rate regime,” it must continuously buy and hold in reserve trillions of US dollars.

These actions have the United States grumbling that China is a “currency manipulator” and that the yuan is “undervalued.” The United States argues that keeping the yuan artificially low gives Chinese exports an unfair advantage. Pressured further by the US economy’s slow recovery, the House of Representatives passed a bill that permits the US government to set up tariffs against countries that undervalue their currencies. The bill awaits approval from the Senate and a signature from the President, but what the world is really waiting for is China’s reaction.

There’s no mistaking that the bill is aimed at the Asian country, and international markets fear is that China will answer back with tariffs of its own, beginning a downward spiral of trade barriers against trade barriers that will disrupt the global economy. So far, China has not been very responsive to the Americans’ concerns, instead choosing to focus on the demands of the domestic economy.

In this, China is not alone as the United States has chosen to do much the same. With its new bill, the US hopes that a revaluation of the Chinese yuan will make US exports more competitive and help along the recovery. (No matter how intense the vitriol against China in policy debates, this is not completely correct: the primary beneficiaries of a revaluated yuan are expected to be even lower-cost exporters like Vietnam. Structural problems in the United States remain the biggest obstacles to recovery.)

Neither side really wants a trade war: the bill’s real significance is in how it represents a failure in international cooperation on the continuing problems plaguing our global economy. The lack of attention to the international repercussions of domestic actions threatens to hurt us all.

China the exporter, United States the consumer—these roles have too long defined the relationship between the world’s two largest economies.* Adjusting to a healthier, more equitable relationship will be a struggle. Undertaking it together is our best hope for recovery.

In 2009, China exported nearly US$300 billion worth of goods to the United States. The United States exported roughly US$70 billion to China.