US-China Bilateral Currency Treaty (BCT)

A Bilateral Currency Treaty (BCT) should be the priority of US-China trade relations. It would be the hallmark of a Trump administration, taking precedence over both the 12-nation Trans-Pacific Partnership (TPP) that excludes China and the Bilateral Investment Treaty (BIT) with it. Indeed, neither TPP nor BIT are even realistic without BCT being ratified and observed first.

Such a pact's significance would be appropriately matched by its simplicity. Here's a possible rough outline:

US-China Bilateral Currency Treaty (BCT)

Goal: To ensure fundamental stability between the US dollar and Chinese yuan (RMB) as the foundation for equitable trade relations, and engineer a gradual appreciation of the yuan to a range of 5.0-5.5.

Key provisions: Initially establish a ceiling for USD/CNY exchange rate, suggested 6.7, with USD/CNH ceiling of 1.5 percent premium over USD/CNY; after initial stabilization period of 1-2 years, aim for a 2 to 5 percent annual appreciation of CNY against USD until target range of 5.0-5.5 USD/CNY is reached; eliminate CNY/CNH spread over the course of this appreciation period.

Operating mechanisms: Dollar/yuan swap lines between major US and Chinese banks; initiation of major purchase program by US commercial banks of Chinese domestic yuan-denominated interbank bonds; gradual unwinding of 15 percent of Chinese holdings of US Treasury debt; monthly bilateral exchange and coordination of reserve and currency derivative positions (swaps, forwards, etc.) between Fed and PBOC and their respective main constituent banks.

Program oversight and control: Quarterly bank representatives' meetings; annual G-2 financial meeting headed by Fed and PBOC chairpersons in conjunction with US Treasury Secretary and Chinese Minister of Finance; annual program overview and progress reports to relevant senior leaderships of both countries - presidency and Congress in US, communist party central committee and State Council in China.

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With BCT as the basis, the BIT and even TPP can then be renegotiated within a fair and sound framework to ensure that 21st-century trade from now on is more balanced, sustainable, and equitable for the general populations of all countries.