The Repercussions of Realignment: United States-China Interdependence and Exchange Rate Politics

Abstract

Analysts generally believe that a weaker currency primarily benefits a country's manufacturing and primary goods sectors. However, many of these industries—and the elected officials who represent them—frequently oppose legislation designed to combat the dollar's overvaluation relative to the Chinese yuan. I argue that legislators hesitate to take aggressive action on the exchange rate issue because doing so could lead to a disruption of the broader United States–China economic relationship. The threat of an economic conflict emerges as a particularly important consideration in the context of currency bills, where proposed legislation is linked to trade policy and other areas of international economic regulation. A Bayesian statistical analysis of legislative behavior on two recent exchange rate bills in the US Congress provides overall support for my hypotheses. Legislators with ties to business interests that rely heavily on the Chinese economy were more likely to oppose the bills, while the strongest support came from legislators representing import-competing domestic producers. The results highlight the ways that economic interdependence shapes bilateral exchange rate politics in particular, and United States–China interactions more generally.