Americans who are trying to compete with Chinese imports don't like the cheap renminbi, and politicians can often be seen denouncing China's currency peg as "unfair" to American manufacturers and whatnot. But, if China didn't buy all our debt, we quickly have to face the laws of economics and, for example, pay for the war in Iraq. Wikipedia puts it in terms more dramatic than you usually get from economists
The ensuing depreciation of the US dollar might price oil out of the reach of the american economy, causing stagflation, a collapse of US oil dependant industries, massive unemployment and other dire economic consequences.And it would be no picnic for China either; aside from the collapse of their largest trading partner, having too much cash could lead to the sort of crises that SE Asia had in the late 1990's, though I don't entirely understand how. (Good references are Nouriel Roubini's blog post, his paper with Brad SetserWill the Bretton Woods 2 regime unravel soon? The Risk of a Hard Landing in 2005-6, and billmon's posts (1 and 2)). Roubini actually thinks it would be best if China started letting its currency slide now, before it gets any worse.
But the point is that the U.S. and China are locked in a weird kind of mutual death-grip, with China having slightly more control over the situation, but all of the fiscal irresponsibility coming from the U.S. So it's natural that in this situation Congress would start blaming China for the situation. But what somehow still managed to blow me away is that their threaten-China bill would be attached as a rider to a spending bill that will only sink us further into this mess. The NYT article doesn't say which spending bill it is, but I bet it's the supplemental $82 billion for Iraq and Afghanistan that Bush didn't deign to put in the budget.
Mr. [Charles] Schumer [D-NY] and Senator Lindsey O. Graham, Republican of South Carolina, stunned administration officials last month by winning bipartisan Senate support for a measure that would threaten China with tariffs up to 27.5 percent if it failed to change its currency policies.
The Senate voted 67 to 33 against killing an amendment that would have attached the provision to a spending bill. Mr. Schumer withdrew the amendment, but Senate Republicans have agreed to allow a vote on the measure before the end of July.