China Trade War Looming?

10-03-2010
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(Hong Kong) - The recent U.S. House of Representatives vote calling for new tariffs on Chinese imports is raising concerns here in Hong Kong (and Beijing). The Levin bill received bi-partisan support last Wednesday and passed on a vote of 348-79.

The legislation was an election year response to Chinese government manipulation of its renminbi currency.

Congressman Sander Levin, D-Mich., and others say China subsidizes its exports by keeping its currency artificially low and it does this by buying up huge amounts of foreign currency (some estimate more than $2.4 trillion). The United States has made repeated demands that China quit manipulating its currency to allow it to increase in value. The Chinese deny manipulation, but have agreed to move slowly on currency reforms.

Apparently China is moving too slow for The U.S. House; the renminbi has only increased in value by about 1.6 percent in the past two years. It is unclear if the U.S. Senate will approve the Levin Bill and if President Obama will sign it if the Senate sends it to his desk for signature.

All of this is really about jobs and election year strategy, rallying union support and laborers. A stronger China currency will lead to more buying power for Chinese workers and that would likely lead to more U.S. exports to China.

Our exports have reportedly risen by about $15 billion this year over last to $83 billion compared to a total of $68 billion in 2009. Each $10 billion increase reportedly saves or creates 80,000 U.S. manufacturing jobs.

If new tariffs are eventually imposed on Chinese products entering the United States, China is likely to respond in kind and a trade war between the world's two largest economies may ensue. Opponents of the new tariffs approach say a trade war is the last thing Americans need as we slowly emerge from recession.

What do you think? Should the United States try to force China's hand on currency by imposing trade tariffs? Is a trade war a likely result?

For more, here's an excellent analysis from former U.S. Trade Representative Susan Schwab. She recently appeared on Bloomberg and can be seen here on YouTube.

 

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