A Trade War With China?

Discussion in 'Economics' started by Tom B, Sep 27, 2010.

  1. Tom B

    Tom B

    A Trade War With China?

    By Robert Samuelson

    WASHINGTON-- No one familiar with the Smoot-Hawley tariff of 1930 should relish the prospect of a trade war with China -- but that seems to be where we're headed and is probably where we should be headed. Although the Smoot-Hawley tariff did not cause the Great Depression, it contributed to its severity by provoking widespread retaliation. Confronting China's export subsidies risks a similar tit-for-tat cycle at a time when the global economic recovery is weak. This is a risk, unfortunately, we need to take.

    In a decade, China has gone from a huge, poor nation to an economic colossus. Although its per capita income ($6,600 in 2009) is only one-seventh that of the United States ($46,400), the sheer size of its economy gives it a growing global influence. China passed Japan this year as the second-largest national economy. In 2009, it displaced Germany as the biggest exporter and also became the world's largest energy user.

    The trouble is that China has never genuinely accepted the basic rules governing the world economy. China follows those rules when they suit its interests and rejects, modifies or ignores them when they don't. Every nation, including the United States, would like to do the same, and most have tried. What's different is that most other countries support the legitimacy of the rules -- often requiring the sacrifice of immediate economic self-interest -- and none is as big as China. Their departures from norms don't threaten the entire system.

    China's worst abuse involves its undervalued currency and its promotion of export-led economic growth. The United States isn't the only victim. China's underpricing of exports and overpricing of imports hurt most trading nations, from Brazil to India. From 2006 to 2010, China's share of world exports jumped from 7 percent to 10 percent.

    One remedy would be for China to revalue its currency, reducing the competitiveness of its exports. American presidents have urged this for years. The Chinese acknowledge that they need stronger domestic spending but seem willing to let the renminbi (RMB) appreciate only if it doesn't really hurt their exports. Thus, the appreciation of about 20 percent permitted from mid-2005 to mid-2008 was largely offset by higher productivity (aka, more efficiency) that lowered costs. China halted even this when the global economy crashed and has only recently permitted the currency to rise. In practice, the RMB has barely budged.

    How much the RMB is undervalued and how many U.S. jobs have been lost are unclear. The Peterson Institute, a research group, says a revaluation of 20 percent would create 300,000 to 700,000 U.S. jobs over two to three years. Economist Robert Scott of the liberal Economic Policy Institute estimates that trade with China has cost 3.5 million jobs. This may be high, because it assumes that imports from China displace U.S. production when many may displace imports from other countries. But all estimates are large, though well short of the recession's total employment decline of 8.4 million.

    If China won't revalue, the alternative is retaliation. This might start a trade war, because China might respond in kind, perhaps buying fewer Boeings and more Airbuses and substituting Brazilian soybeans for American. One proposal by Reps. Tim Ryan, D-Ohio, and Tim Murphy, R-Penn., would classify currency manipulation -- which China clearly practices -- as an export subsidy eligible for "countervailing duties" (tariffs offsetting the subsidy). This makes economic sense but might be ruled illegal by the World Trade Organization. A House committee last week approved this approach; the full House could pass it this week. Ideally, congressional action would convince China to negotiate a significant RMB revaluation.

    Less ideally and more realistically would be a replay of Smoot-Hawley, just when the wobbly world economy doesn't need a fight between its two largest members. Economic nationalism, once unleashed here and there, might prove hard to control. But there's a big difference between then and now. Smoot-Hawley was blatantly protectionist. Dozens of tariffs increased; many countries retaliated. By contrast, American action today would aim at curbing Chinese protectionism.

    The post-World War II trading system was built on the principle of mutual advantage, and that principle -- though often compromised -- has endured. China wants a trading system subordinated to its needs: ample export markets to support the jobs necessary to keep the Communist Party in power; captive sources for oil, foodstuffs and other essential raw materials; and technological superiority. Other countries win or lose depending on how well they serve China's interests.

    The collision is between two concepts of the world order. As the old order's main architect and guardian, the United States faces a dreadful choice: resist Chinese ambitions and risk a trade war in which everyone loses; or do nothing and let China remake the trading system. The first would be dangerous; the second, potentially disastrous.

    Copyright 2010, Washington Post Writers Group

  2. There will be no trade war between U.S. and China in near term. The White House does not agree with what the House is doing. There is a low intensity trade war between China and Japan going on now.
  3. Obama will have no choice but to agree with the house on this if he wishes to bolster his flagging numbers and win re-election. This is the fatal flaw of western democracy, it eventually degenerates into populism and potentially fascism.
  4. The congress men may be opportunistic but are not stupid. They are toying around with the election year gimmick sanctions against China, but will be either stopped by others or back off by themselves. They do not want to be responsible for sending U.S. economy into an abyss, even for the tantalizing price of getting elected.
  5. Correct. Its better for the US economy to slowly go into an abyss with no return.
  6. emg


    Trade war with china will not happen. The U.S didnt go to trade war on japan during the 80s
  7. 377OHMS


    lol Stupid Statement of the Day Award nominee right there.

    China cheats. Its that simple. If the world needs to feel some pain to correct that then lets get on with it.

    How about a 100% ad valorem import tariff on all Chinese products? Then we can have a nice worldwide depression while China decides if it is going to play fair or not.
  8. Jobs will not come back to the USA even if you put 100% tariffs on Chinese goods, they will simply move to other countries as has been happening even before the financial crisis. If you are a china watcher, you will know many factories before the crisis have closed along the Pearl Delta moving to Vietnam and Indonesia.

    What you are advocating are autarkic policies which will hurt our exporters thus increasing our unemployment rate. China's currency has had devaluation over the last 2 years, when i was in China 2 years ago, i think the Yuan was 7.2 to 1 usd today its 6.6 to 1, yet the trade deficit has increased in the interim. You need to educate yourself on what causes trade deficits.
  9. I would RELISH a trade war with China. There is no free trade currently with them. We are one of their job creation services.

    This is the 2010 YTD amount of goods/services between ys. The hell with China. We buy almost 400% more than they buy from us. And a lot of the following is probably them buying agricultural or even "recycled/scrap goods."

    China purchases from USA 48,551.1
    USA purchases from China 193,918.2
    YTD Deficits -145,367.1


    New formula, China must buy an equivalent amount from the USA as we buy from them , or else they pay full tariffs on the difference.
  10. 377OHMS



    If I were running things I would make sure that if you wanted a toaster-oven in the USA you had to buy it from a US manufacturer. I would limit imports from China to raw materials, almost nothing manufactured. If China developed a monopoly in any particular raw material I would create trade barriers to it and develop domestic capacity.

    That would cause some immediate hardship but would strengthen the US relative to China considerably over time.

    China doesn't view the world as a free market in which to conduct free trade, it see the world as something to exploit towards some kind of hegemony. Its time to take them on.
    #10     Sep 27, 2010