A China-US trade war: closer than ever?
The US Senate recently voted three consecutive times on a bill designed to take punitive action against China over its alleged ‘under-valued’ currency. The votes are an unsettling reminder of the angst lurking below the surface of a country burdened by huge unemployment. And now, with the US trying to revive its manufacturing sector, the shadow of a trade war between China and the US looms ever larger.
Immediately following the Senate votes in early October, three Chinese agencies — the Foreign Ministry, the Central Bank and the Ministry of Commerce — responded to these actions, claiming they could spark a trade war. In response to the strong Chinese reaction, the US has launched a seemingly concerted attack on the Chinese renminbi. Ben Bernanke, chairman of the US Federal Reserve, said in a testimony to the Joint Economic Committee (JEC) that, ‘Right now, a concern is that the Chinese currency policy is blocking what might be a more normal recovery process in the global economy’, and: ‘It is to some extent hurting the recovery’. Soon after came President Obama’s public criticism of China. At a White House news conference, he said: ‘China has been very aggressive in gaming the trading system to its advantage’, and: ‘It is indisputable that they intervene heavily in the currency markets’. He did, however, caution against the Senate bill.
New York Democrat Senator Charles E Schumer, author of the currency bill, has not this time been alone. Senator Lindsey Graham, the South Carolina Republican, started similar moves against the Chinese yuan in the Senate in 2005. In the following six years, their proposals had failed. However last week, the Senate finally voted to pass their proposed legislation.
The high-profile bill, combined with Obama and Bernanke’s criticism of the yuan, delivers an important message to China. As Senator Charles E. Schumer said, the actions constitute ‘a message to China that the jig is finally up’. Significantly, he thundered: ‘We’re already in a trade war’.
Is the bill just about grandstanding like many other bills before it? Most likely not. From an economic perspective, passing such a bill is not a sound solution to the problem of imbalances between China and the US and is likely to be diplomatically and economically damaging to both countries. And it is potentially in violation of WTO rules. But both parties to the debate can appeal to their own economic justifications. For example, while the US Senate accused China of manipulating its currency, thus contributing to unemployment in the US, opponents could counter that the Federal Reserve’s loose monetary policy intentionally depreciates the US dollar, thus exporting inflation to China. Equally, while the US could allege that a market-determined yuan would shrink the trade deficit and increase employment, China could dismiss this by saying that other emerging countries would simply replace it as a major exporter of cheap goods to the US.