US walks fine line on China trade

Building Brics: A bill being debated by the US Senate this week could lead to sanctions being imposed on goods from China. But analysts believe that might do more harm than good.

Industries as diverse as car manufacturing, textiles and electronics are said to have suffered as a result of competition from China. Reuters

It has all the makings of an old-fashioned trade war.

With elections looming next year and unemployment sitting at an uncomfortable 9 per cent, it is perhaps no surprise that US politicians have China in their sights as they seek ways to placate a concerned public.

This week, the US Senate is debating a bill that would try to rectify what many in the US and the rest of the world see as an undervalued yuan.

The Currency Exchange Rate Oversight Reform Act of 2011 would allow the US to impose duties on goods from countries that the US authorities determine are keeping their currencies at artificially low levels. There is no doubt which nation US politicians have in mind.

"My colleagues, both Democrats and Republicans, agree that China's deliberate actions to devalue its currency give its goods an unfair competitive advantage in the marketplace," Harry Reid, the Senate majority leader, said this week. "Their goods do not deserve that. That's not fair. It hurts our economy. It costs American jobs."

Only last month, a report from the research organisation the Economic Policy Institute said the US's trade deficit with China, which last year hit a record high of US$273.1 billion (Dh1 trillion), had cost 2.8 million jobs in the US.

Industries as diverse as car manufacturing, textiles and electronics are said to have suffered as a result of competition from China, which has long since become the world centre of manufacturing.

While Chinese exports to the US hit $364.9bn last year, in the opposite direction the flow of goods was barely a quarter of that at $91.9bn.

Although the yuan is now about 7 per cent more valuable against the dollar than in June last year, when Beijing relaxed controls and allowed a limited appreciation, in the US it is still considered to be too low. Estimates in the US suggest the yuan is as much as 40 per cent undervalued against the greenback.

Even so, Beijing's response this week has been uncompromising, with the foreign ministry, commerce ministry and central bank all lashing out over the legislative action in the Senate.

"This will escalate the exchange rate issue, adopting a protectionist measure that gravely violates [World Trade Organization] rules and seriously upsets Sino-US trade and economic relations," said Ma Zhaoxu, the Chinese foreign ministry spokesman.

The central bank warned of "a trade war, which we would not like to see".

There are many uncertainties facing the bill, including whether it will be passed by the Senate, not to mention the House of Representatives, which is Republican-controlled and potentially less willing to impose measures seen as restricting free trade.

John Boehner, the speaker of the House, has indicated the bill could face a rough ride.

"It's pretty dangerous to be moving legislation through the US Congress forcing someone to deal with the value of their currency," he said.

Then there is the question of whether Barack Obama, the US president, would choose to sign the measure into law, and if that happened, what action the US would take.

Still, the consequences of action could be serious, says Patrick Chovanec, an associate professor in the School of Economics and Management at Beijing's Tsinghua University who worked as an aide to Mr Boehner in the 1990s.

"The ultimate concern for China is the US slapping [on] very high trade sanctions," he says.

Mr Chovanec believes China should allow the yuan to appreciate, and says the low value of the currency has caused problems of inflation and the accumulation of vast reserves. Yet he warns that forcing China's hand could do more harm than good.

For a start, there is the likelihood that Beijing would appeal to the World Trade Organization if tariffs were imposed on its goods.

If China won, that would leave Washington in a weaker position when it comes to trying to persuade Beijing to allow the yuan to appreciate. The US would no longer be able to wield tariffs as a threat.

"It removes that instrument from your hands forever," says Mr Chovanec. "You don't even have the threat of it anymore."

He also cites the experience of the 1980s when Japan appreciated the yen in response to pressure from the US as illustrating the ineffectiveness of forcing another country to revalue its currency.

Improvements in the trade balance did not materialise as expected, because other factors, such as distribution, hampered US goods in the Japanese market.

Similarly, there are reasons for China's becoming a successful exporter that are not tied to the value of the yuan.

"You have substantial credit from the banking system and state-owned enterprises with soft budget constraints," says Mr Chovanec.

In the face of such factors, using strong-arm tactics to make China revalue the currency may fail to achieve the effect the US wants.

"I am sympathetic, but pulling the trigger and doing it is really, really problematic, not just because China will retaliate but because it might be counterproductive," says Mr Chovanec.

"But it's campaign season in the United States, and there's a lot of frustration about … the inability to create jobs," he says. "People are looking for answers and an answer is to export more."