Trade War, Trade Law

Last week the US Senate passed the Currency Bill, which calls for the U.S. government to impose tariff sanctions against countries that manipulate their currencies. Of course, the currency on their minds is the Chinese yuan, and probably with good reason. Over the past decade, the United States has had an enormous trade deficit with China, and last year the deficit figure was $273 billion, the largest ever (see the stats). The ever-growing imbalances between the two have persisted into this year, and the yearly deficit has now reached $290 billion.

Besides the fact that the United States itself was a “currency manipulator” when the Fed pumped $600 billion into the economy, thereby deliberately weakening the dollar (in recent years, the US dollar index has been the lowest since 1973, see the figure on the left), the Senate’s effort to solve the problem will merely risk a trade war, in which both sides exchange retaliatory measures only to hurt themselves. First, the yuan has increased by 30% in nominal terms since 2005, and yet America’s deficit with China has widened (see the figure on the right). Second, “adjustment” or “re-balancing” has already been under way, albeit at a snail’s pace, and will continue without anybody having to launch a mutually destructive trade war. Chinese unit labor costs have been growing fast at about 8.5% annually, rapidly catching up to the more well-to-do countries. This means that the rate of the yuan appreciation against the dollar in real terms has been and will be quite high, about 15% per year (see here). It also means some of the manufacturing jobs America has lost to China might come back sooner or later. Indeed, this “re-shoring” has already happened in some sectors according to the Boston Consulting Group (see here).

This doesn’t mean that the United States cannot or should not do anything in the mean time. For instance, the American solar panel industry has been severely hurt by a near overtake of the industry by Chinese competitors fed and nurtured by massive Chinese government subsidies, which may well be a violation of WTO trade law. The well-known failure of Solyndra is just one of the many victims of nearly 200 Chinese subsidy programs. The Obama administration has taken some steps to bring this issue to the WTO, the right place to go (see here). So it’s law, not war, that should govern international trade. (The irony is that to curb climate change and save the earth, probably we need to urge, rather than discourage, the Chinese government to support their clean energy development. And this is why environmentalists hate the WTO.)

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  1. Jocelyn
    October 18, 2011 at 5:33 pm | #1

    I think the US Senate is right in passing the Currency Bill, so the government can impose tariff sanctions against countries who are manipulating their currencies because if not the trade deficit is going to continually increase.

  2. Yesenia Gutierrez
    October 19, 2011 at 6:44 pm | #2

    While the intent of the Senate is a good one, I do not believe they have considered the consequences of their actions. They are in the right for wanting to help the trade deficit, and even more so the economy but the passing of this bill will no doubt anger the Chinese, as they have “strongly condemned the bill,” according to the New York Times. Although, I don’t believe there will be a trade war due to both countries economic interdependence, China will do something in response. I’m glad that jobs are coming back to the United States, but there is the cynical part of me, that says that companies will find another place to go, not Mexico for the reasons that the Boston Consulting Group suggested. As for China’s “bankrolling of clean energy,” that the New York Times article talks about, whether or not they broke trade law is yet to be determined. But what is clear is that they have not been following the WTO rule to “disclose details of their subsidies every two years” since the last year they did this was 2001. Some action might be taken but I doubt it will be one that has a significant impact on the Chinese.

  3. daniel kemether
    October 20, 2011 at 10:28 am | #3

    on trade, war, and trade law-
    I think America has gotte in too deep with our debt with china… We now are faced with the problem of paying off debts as well as finding a way to stimulate a declining economy. im happy to hear some of our outsourced jobs will be coming back to America this should help our unemployment, but at the same time it could also raise the prices of American goods. theres always a positive and a negative, we just need to find the decisions that possitives outweigh the negatives.

  4. Irain J.
    October 20, 2011 at 1:41 pm | #4

    America is now faced with the problem of seeing their debts to china continue to increase. Now that the Chinese currency is changing due to inflation it would be much more difficult to pay back the debt. the Chinese are simply progressing and the Americans are cautious of a bad turn of events.

  5. Samuel Park
    October 20, 2011 at 1:52 pm | #5

    Regardless of what the debt is to China, Im happy to see that Congress is doing something to help improve our economic crisis. Like Daniel I’m glad to hear that some of out outsourced jobs would be brought back to the United States. The Currency Bill is a small stepping stone, and i hope to see more bills to be passed to help out our economy.

  6. Lauren Barrera
    October 20, 2011 at 1:55 pm | #6

    I found that a great part of the article was “So it’s law, not war, that should govern international trade.” This should remain an ideological goal!

  7. Mitchell
    October 20, 2011 at 2:00 pm | #7

    I guess theres a dilemma between deciding whether or not we want to encourage china to either support clean energy or follow the rules of the wto.

  8. Brishonn
    October 27, 2011 at 4:15 pm | #8

    “It’s law, not war, that should govern international trade”

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