U.S. Senate vote opened a week of debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would allow the U.S. government to slap countervailing duties on products from countries found to be subsidising their exports by undervaluing their currencies.
U.S. lawmakers, eyeing 2012 elections, said keeping China's currency undervalued had cost American jobs and that a fairer exchange rate would help cut an annual trade gap Washington puts at more than $250 billion.
"By using the excuse of a so-called 'currency imbalance', this will escalate the exchange rate issue, adopting a protectionist measure that gravely violates WTO rules and seriously upsets Sino-U.S. trade and economic relations," foreign ministry spokesman Ma Zhaoxu said in a statement posted on China's official government website (www.gov.cn) on Tuesday.
Here's one place I really think the Dems are wrong, and I have no idea where the GOP stands. Starting a trade war with China is absolutely NOT the way to get the economy back on track. The only thing this is going to do is increase the cost of living, which hurts the low income earners and generally reduces disposable income across the board - hindering a recovery.
So what do you suggest we do to stop currency manipulation by China? Or do you not think they are manipulating values, seeing as you quoted a Chinese Government spokesman.
Here's a Krugman article that gives some background and the effect Chinese manipulation has on the global recovery.
I quoted the Chinese spokesman to illustrate what they intend to do if the US pursues protectionist policies, not to say they weren't distorting the currency equation. I think Krugman is brushing off the effects of pissing off China far too lightly - you can't get around slapping an import duty on China would have the immediate primary effect of raising the cost of living in the US by about the same amount (something Krugman completely ignored). From there you get the rest of the fallout:
- Serious WTO issues. The US needs the WTO far more than China does and a trade war would collapse a lot of the WTO's authority. That's certainly bad for the US and very bad for the world economy.
- Chinese retaliation on investors. A lot of US companies have strong investments in China. It wouldn't be hard for China to retaliate against the US through holding those investments to ransom. They've arbitrarily confiscated property before and would easily do it again if it suited their political interests.
- Chinese retaliation on the Fed. I disagree with Krugman's fundamental assumption that China cares as much about their economic position as the US does. The only thing China has to fear from the US is economic fallout, which doesn't really rate as highly as Krugman implies. The fallout on the US side would hurt the government far, far more - especially going into an election cycle. Dumping their bond and currency stockpiles would further weaken the US Dollar as the global reserve currency, further weaken the US credit rating and creates fairly serious long term issues associated with those.
The US depends far more on Chinese manufacturing to maintain its quality of life than China depends on US money to support its lifestyle. There's simply not sufficient leverage for the US to pull this one off in my opinion.
