Deal or no deal?

There is a strong case to be made that, far from manipulating its currency for narrow trade purposes, China has allowed the yuan to appreciate against most of its trading partners. U.S. interests lie in an economically strong China. The U.S.’s (and the world’s) problems would be aggravated by upsetting China’s apple cart and risking a recriminating trade war and a sharper slowdown in the Chinese economy.

Despite Geithner’s acknowledgement of President Obama’s claim that China is manipulating its currency, the Obama Administration may very well conclude that in the current economic environment, it makes little sense to push the point aggressively. And Geithner will be able to cite China’s fiscal stimulus package and other programs, such as healthcare reform, as measures that will, over time, lead to a stronger yuan.

Finally, many U.S. policymakers share the conceit that they know where the yuan would move if it were allowed to float freely — they have ceased to question the assumption that it would rise. But it’s possible that, if allowed to float, the yuan might actually sink, with hot-money reversing, global companies finding it easier to repatriate profits, and domestic savers diversifying overseas.

As the financial crisis has underscored, policy action often has unintended consequences, and the Obama Administration and Congress should be careful what they wish for.