A Coming Trade War With China?

The U.S. Congress is considering legislation that would retaliate against China for manipulating its currency to the detriment of U.S. jobs.

The United States runs a $273 billion annual trade deficit with China, meaning it imports much more than it exports to the rising Asian power.  The Economic Policy Institute (EPI) recently estimated that this U.S.-China trade deficit cost the U.S. 2.8 million jobs between 2001 and 2010, with all 50 U.S. states affected by job losses in the manufacturing and services sectors.  As EPI notes, “increases in U.S. exports tend to create jobs in the United States, and increases in imports tend to lead to job loss.  Thus, a growing trade deficit signifies growing job loss.”

American leaders have increasingly blamed this trade deficit on China’s unwillingness to “play fair” when it comes to trade by keeping its currency’s value artificially low relative to the dollar.  While a weak currency doesn’t sound like a good thing, it makes a country’s exports cheaper abroad and it makes other countries’ imports more expensive at home.  This means goods and services produced in China are more competitive both in China and abroad, which creates jobs and economic growth in China and harms competing countries’ economic prospects.

In retaliation for China’s currency manipulation, the United States Congress is now considering legislation that would impose tariffs (essentially a tax) on Chinese imports.  China has claimed that such action would violate the rules of the World Trade Organization, which focuses on lowering trade barriers worldwide, but Congressional supporters of the legislation dispute that.  Proponents claim these steps could ultimately create up to 2 million American jobs.  The Senate is in favor of the bill but House leaders have blasted it as “dangerous” and President Obama appears unenthusiastic but noncommittal.  For its part, China has warned that such action could lead to a trade war, which would not be good for America’s economy.  In  New York Times editorial last week noted economist Paul Krugman downplayed the risks of a trade war:

“And the reality of the unemployment disaster is also my answer to those who warn that getting tough with China might unleash a trade war or damage world commercial diplomacy. Those are real risks, although I think they’re exaggerated. But they need to be set against the fact — not the mere possibility — that high unemployment is inflicting tremendous cumulative damage as we speak.”

What do you think?  Should the United States get tough on China for its currency manipulation?  Why is President Obama hesitant to join his fellow Democrats in supporting this legislation?  What will be the economic and political consequences if the U.S. imposes tariffs on Chinese imports?

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