China tariffs Senate, Obama should be wary of threats

Published 11:59 am Tuesday, October 19, 2010

The U.S. House has given American trade and economics officials new ammunition with passage of a bill that would allow the Commerce Department to impose tariffs on all imported goods from countries that manipulate their currency to encourage exports. The bill is aimed straight at China, which has consistently undervalued its currency. But as any beat cop can testify, waving around a loaded gun can be dangerous.

What the wobbly U.S. economy does not need is a trade war. Fortunately, new tariffs can’t be imposed unless the Senate acts on the House bill, and that won’t happen until after the election.

Sens. Debbie Stabenow, D-Michigan; and Charles Schumer, D-N.Y., have similar legislation pending in their chamber.

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Stabenow wrote in The Detroit News recently that China’s undervalued currency “has far-reaching effects on the global economy.” She added that the loss of 4.7 million American manufacturing jobs in the last decade shows how “devastatingly effective” China’s currency policy has been.

A national unemployment rate in the 10 percent range and the loss of millions of jobs does make the political atmosphere ripe for demagoguery on trade. But the administration and cooler heads in the Senate can’t allow themselves to be stampeded by the House vote, which passed the bill with a large, bipartisan margin. The vote was 348-79.

So far, President Barack Obama has imposed tariffs on certain Chinese steel products and tires, and China has responded with countervailing tariffs on U.S. poultry products. The situation can’t be allowed to deteriorate.

If the House currency bill gives the administration more credibility in its talks with the Chinese on currency, or serves as a catalyst for members of the International Monetary Fund meeting in Washington this weekend to try to bring some kind of pressure on the Chinese to allow their currency to float more flexibly on international currency exchanges, fine.

But the Chinese will not want to be seen to be buckling solely under U.S. pressure.

U.S. Treasury Secretary Timothy Geithner on Wednesday said some sort of international “mechanism” is needed with the authority to nudge countries to revalue their currencies so that they are not serving as export subsidies. An undervalued currency makes exports cheaper and imports more expensive.

But contrary to the assertions of Stabenow, America’s economic problems cannot be laid at China’s doorstep. High costs and global competition had more to do with the demise of U.S. manufacturing than the price of the Chinese yuan against the dollar.

As the Wall Street Journal has pointed out, Japan 25 years ago was accused of manipulating its currency, and it revalued its yen under U.S. pressure, but this country still has a trade deficit with Japan.

It should be remembered that China is our third largest trading partner, and Michigan in 2008 exported $1 billion worth of goods to that country. It won’t help to make tense trade relations with China even worse, especially since it is a major holder of U.S. debt.

The best course is to pursue Geithner’s suggestion of an international effort aimed at all countries that undervalue their currency rather than just paint a bull’s-eye on China.

That will have a better chance of achieving the goal of a more realistic balance between China’s currency and the dollar.