A stronger Chinese currency (RenMinBi (RMB) or Yuan to which it is also referred) would change the world as we know it. The US has long been trying to persuade the Chinese to increase the value of their currency with very little success. If the RMB were to rise drastically in value (becoming closer to the US currency in value), the cheap consumer goods that the world purchases from China would cost more. This would have several possible effects: we may pay more for our goods here; our goods would compete more with Chinese goods on the international and domestic markets and within China itself; some other country, besides China, with a lower currency would more than likely attract massive foreign investments; China’s growth would effectively slow due to disinvestment in favour of a country with a lower currency (perhaps Mexico???) leaving the US in its position as the sole global superpower; China’s US foreign currency reserves would be less valuable in relative terms…etc., etc. The list of changes that could ensue is long.
Since most of these scenarios puts the US at an advantage over China, and since the losses would outweigh the gains for China, it is likely that the Chinese will not increase their currency very much; if at all.
The US is now looking to Brazil to support them in their demand that China increase the value of the RMB; Brazil would also likely serve to gain with an increased value in RMB through an increase in Brazilian exports. While having other countries back the US demand may put more pressure on the Chinese to increase their currency, it is still unlikely that the Chinese will do so.
The US is also unable to drastically lower its own currency value since this could result in many nations dropping the US currency as the stable world currency in favour of another currency like the Euro.
The US is in decline and it needs China to slow down in order to maintain its current position at the top. The latest January/ February 2011 Foreign Policy cover story suggests that the US is on a path of permanent decline. China knows that this is the case and they have demands on the US that the US is unwilling to meet. For example, China has concerns over US military presence throughout the Asia pacific region (most notably in South Korea and Japan; but the Chinese are also concerned about weapons trading between Taiwan and the US). China can continue to rise in power if it holds its currency at its current value. At the same time China knows that it can wait for the US decline to force them out of their military and geo-strategic position in the Asian-Pacific. For all of these reasons, I see it as very unlikely that the Chinese will sabotage their own gains by increasing the value of their currency so that the US can remain as the world superpower.
However, it will become an increasingly important goal of the US to do something about this situation. All we can do is wait and see what that is. It most certainly will not be war with China, and the US will have to be cautious in its approach to avoid diplomatic and trade retaliation from China itself. How do you think this situation is most likely to play out?