Tag Archives: protectionism

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?

Five Stories You Might Have Missed

It’s been an interesting week for the U.S. economy. According to figures released on Thursday, the U.S. trade deficit jumped by 16.3 percent to $32 billion in June, a figure sharply higher than the $27 billion that had been forecast. The dramatic increase in imports was fueled by the “Cash for Clunkers” program, which led to a dramatic increase in auto imports. Meanwhile, the Commerce Department reported that the poverty rate had increased from 12.5 percent in 2007 to 13.2 percent in 2008. The poverty rate, which is defined as the number of people with an annual income of less than $11,200 (or less than $22,000 for a family of four), increased as a result of the global economic downturn. Home foreclosures also remain near their record high level. The troubled status of the U.S. economy led the Federal Reserve to indicate that it would be unlikely to raise interest rates in the first half of next year.

In news from outside the U.S. economy last week:

1. A trade dispute between the United States and China may be headed to the World Trade Organization for resolution. The United States last week imposed a new duty on tires manufactured in China, less than one week after it also imposed higher tariffs on Chinese steel piping. A spokesperson for the Chinese government condemned the move as protectionism, warning that “a chain reaction of trade protectionist measures that could slow the current pace of revival in the world economy.” Observers fear that the Chinese could respond with higher tariffs on U.S. agricultural and automotive exports, potentially sparking a trade war. But in an interesting editorial in the Financial Times, Clyde Prestowiz argued that the imposition of higher tariffs on Chinese exports to the Untied States could potentially help the push for free trade.

2. With the German election just a couple of weeks away, campaigning is in full force, and observers are already working through the numerous possible coalition arrangements. But in perhaps the most interesting development to date, German Finance Minister Peer Steinbrück last week called for the imposition of a new global tax on international financial transaction, the proceeds of which would be used to repay governments for the cost of fiscal stimulus packages and bank rescue operations. While not dismissing the idea out of hand, German Chancellor Angela Merkel called the proposal “electioneering.” Steinbrück’s call follows a similar proposal made by the Chair of the British Financial Services Authority, Lord Turner, and could make for interesting discussions at the upcoming G20 summit.

3. The counting process in the Afghan elections continues to drag on. Although incumbent President Hamid Karzai now has enough votes to win the disputed presidential election outright, according to the most recent results of the Independent Election Commission, widespread irregularities have led to calls for partial recounts. On Sunday, the IEC agreed to move forward with discussions on a recount, but it stopped short of spelling out precisely what votes would or would not be included. The Electoral Complains Commission, a body established by the United Nations to observe elections and investigate allegations of fraud, noted “clear and convincing” evidence of fraud and vote rigging in southern provinces which went heavily towards Karzai.

4. The first high-level contact between the government of Zimbabwe and the west took place on Sunday, as the European Union’s Commissioner for Humanitarian Aid and Development and the Swedish Prime Minister (who also holds the European Union’s rotating presidency) met with representatives of the Zimbabwean government in Harare. The meeting is the first high-level contact since the European Union imposed sanctions against Zimbabwe in 2002. While the European Union delegation remained noncommittal regarding the future direction of contact with the Zimbabwean government, stating only that “We’re entering a new phase. The [power-sharing agreement in Zimbabwe] was an important step forward, but much more needs to be done. The key to re-engagement is the full implementation of the political agreement.” The status of the power sharing arrangement in Zimbabwe remains uncertain, as President Robert Mugabe and his rival, Prime Minister Morgan Tsvangirai, continue to struggle over the distribution of political authority within the country.

5. The government of Guatemala last week declared a “state of calamity” in response to the widespread hunger gripping the country. The World Food Programme estimated that the country would require an immediate shipment of 20 tons of food the worst affected areas in order to stave off starvation. Alvar Colom, Guatemala’s president, said that global climate change was affecting the El Niño, causing a massive drought in the northeastern portion of the country. But Colom was also critical of the high level of inequality in the country, observing that “There is food, but those who go hungry have no money to buy it.” Critics also note that poorly defined land rights, narcoviolence, and alleged corruption have also undermined food production. According to the World Food Programme, half of all children under five in Guatemala suffer from malnutrition.

And in a bonus story for this week:

6. After more than three months since the general election, the political situation in Lebanon remains cloudy. On Thursday, Saad Hariri, the leader of Lebanon’s pro-Western majority, resigned as prime minister designee, despite performing well-above expectations in June’s elections. According to Hariri, the country’s parliamentary minority blocked efforts to develop a coalition government, leaving the country in a period of political uncertainty.

Five Stories You Might Have Missed

The world is preparing for the upcoming G20 summit, scheduled to meet in London later this week. While each country is arriving at the meeting with their own objectives, it is clear that the global financial crisis will dominate discussions. In this context, the main issues on the table appear to resolve around three key policy debates: developing a globally coordinated stimulus package, strengthening global financial regulation, and reforming the international financial architecture, particularly the International Monetary Fund. Police are preparing for widespread tens of thousands of protestors accompanying the meeting.

In other news from the previous week:

1. President Barack Obama on Friday announced that the U.S. would expand its commitment in Afghanistan, sending an additional 4,000 troops to train Afghan security forces. The Obama administration is also hoping to refocus the U.S. mission in Afghanistan, moving away from the nebulous mission of national building and democratization and instead focusing on defeating al-Qaeda and Taliban militants operating along the Afghan-Pakistan border. FT blogger Gideon Rachman raises some important questions about the new strategy, pointing out that bringing the fight to al-Qaeda militants in Pakistan may well undermine the stability of Pakistan—an ultimately self-defeating strategy, he argues.

2. After struggling for weeks to secure a coalition government, incoming Israeli Prime Minister Benjamin Netanyahu was able to convince their center-left rival, the Labour party, to join a new coalition government on Tuesday. Netanyahu hoped to bring the center-left Labour party into the coalition in order to avoid allying with a number of far right parties and running the risk of souring relations with the U.S.  Nevertheless, the new government raises concerns among many Palestinian leaders about the future prospects of the peace process.

3. The medical journal the Lancet offered a powerful criticism of Pope Benedict’s recent speech during a trip to Cameroon and Angola. During the visit earlier this month, the Pope claimed that condom use increased the prevalence of AIDS on the continent. After the World Health Organization and other AIDS experts attacked the claim, the Vatican last week issued a statement that reasserted the Pope’s claim that condom use was both ethically wrong and actually exacerbated the AIDS crisis. The condom/AIDS debacle is just the recent in a series of missteps and controversies that have plagued the current Pope. In February, he lifted the excommunication of four ultra-conservative clerics who denied the holocaust. And in 2006, he quoted a fourteenth century emperor who characterized Islam as “evil and inhumane.”

4. On a Thursday press conference with British Prime Minister Gordon Brown, Brazil’s President Luiz Inácio Lula da Silva told reporters, “This [current global economic] crisis was caused by the irrational behaviour of white people with blue eyes, who before the crisis appeared to know everything and now demonstrate that they know nothing…I do not know any black or indigenous bankers so I can only say [it is wrong] that this part of mankind which is victimised more than any other should pay for the crisis.” Brown immediately sought to distance himself from the comments. But the comments underline the potential difficulty of securing agreement at the upcoming G20 meeting, in which Argentina and Brazil will be pushing for reform of the international financial institutions and campaigning against protectionist policies in the developed world.

5. German Chancellor Angela Merkel cautioned against excessive stimulus spending in Europe while at the same time calling on China to expand its stimulus package in an effort to address the global financial crisis. In an interview given in anticipating of the upcoming G20 summit, Merkel argued that the current crisis was caused, in part, by policies which facilitated unsustainable growth with too much money. She argued it was necessary to avoid repeating those mistakes in the recovery. Spain’s finance minister, Pedro Solbes, on Friday said that Spain would not be able to expand its own stimulus spending, fearing that excessive national debt would undermine future economic prospects.

Five Stories You Might Have Missed

The meeting of the Group of Seven, or G7, took place in Rome on Saturday.  And while anti-poverty campaigners appealed for the group to address the problem of increasing global inequality and rising poverty, the primary focus of the annual meeting was the global economic crisis.  Following the dispute over the inclusion (and subsequent removal) of buy-American provisions in the U.S. economic stimulus package, the G7 felt the need to include a commitment to use “the full range of policy tools” to address the global downturn while simultaneously renewing commitments to avoid protectionist measures.  This amid news that the Eurozone has now entered its worst slump in fifty years, with the Eurozone GDP falling 1.5 percent in the fourth quarter of 2008, and the German GDP falling by 2.1 percent of the same period.  Amid the poor economic news, the European Central Bank is expected to cut its prime interest rate to 1.5 percent, its lowest rate ever.  The U.S. Federal Reserve’s federal funds rate has already been effectively reduced to 0 percent.

In other news from the previous week:

1.  A U.S. missile strike in the South Waziristan region of Pakistan (along the Afghan border) on Saturday killed at least 25 al Qaeda-linked militants.  The drone-launched missile was the third such strike since President Obama took office.  The Pakistani government has been undercut the influence of militants in the region, believed to be a bastion for al Qaeda.   But the continued strikes by the U.S. also threaten to undermine the legitimacy of the Pakistani government.

2. Israel announced it would not agree to a ceasefire with Hamas unless an Israeli soldier held since he was kidnapped in a cross-border raid in 2006.  The Israeli position appears to complicate efforts to reach a permanent ceasefire.  A series of rocket attacks and retaliatory strikes (or strikes and retaliatory rocket attacks, depending on whose press you read), has made establishing a lasting ceasefire between the combatants more difficult.  Further complicating the situation were Israeli elections held last week.  The elections handed Tzipi Livni’s centrist Kadmina party a narrow one-seat victory over the rival center-right Likud party under Benjamin Netanyahu.  The close victory has left both parties scrambling to line up potential coalition partners, leaving the final outcome of the election uncertain.

3.  The outlook for the ongoing crisis in Zimbabwe appeared to brighten a bit last week, as a unity government took office.  Under the terms of the agreement, Robert Mugabe will remain President of Zimbabwe.  His political rival, Morgan Tsvangirai, will become the country’s prime minister.  The government of national unity appears to have—at least temporarily—brought to a close the country’s ongoing political crisis.  But how long this remains the case is unclear.  By Friday, the arrest of Roy Bennett, Tsvangarai’s nominee for deputy agriculture minister, on charges of treason raised questions about the degree to which the new government represents a real break with the past.    Further, the heavy lifting of addressing a national cholera outbreak and brining the country’s economy back from total collapse remains on the to-do list. 

4. The situation in Afghanistan appears to be deteriorating.   A series of bombings and well-coordinated attacks by gunmen over the last several days has left dozens of people dead.  While such attacks had become increasingly common in the Taliban-dominated areas along the Pakistani border, the most recent attacks occurred in what had historically been viewed as the safest region of the country—its capital, Kabul.  Analysts view the attacks as an indication of the increasing support and sophistication of Taliban-backed forces.  The attacks come amidst indications that the Obama administration is considering a request to increase by 30,000 the number of troops deployed to Afghanistan.

5. Disputes between European Union member states over the structure and nature of efforts to address the global economic crisis have led to tension within the Union.  On Tuesday, the Czech Republic’s prime minister (and current president of the European Union) accused the member state governments of engaging in policies that threaten to “deform” the Eurozone.  On Wednesday, in an indication of how serious the dispute is, the European Union scheduled two emergency summits to address the crisis, suppress protectionism, sustain employment, and prevent the bloc’s political fragmentation into old and new member states.

Five Stories You Might Have Missed

The global economic crisis continues to expand.  Despite the announcement of a tentative agreement on a $827 billion stimulus package in the U.S. Senate and announcement of a $200 billion lending facility by the U.S. Federal Reserve intended to encourage more lending by banks and credit card companies, the economic numbers continue to decline.  Despite being relatively insulated from global markets, Brazil announced a large slump in output and a decline in jobs last week.  Following an announcement that the national economy contracted by 4.6 percent in December—the largest contraction since reunification in 1990s—and more than 2 percent last year, the German Economic Minister, Michael Glos, offered to tender his resignation.  Many observers are also concerned that some of the stimulus packages proposed by national governments may rekindle protectionist measures.  (Indeed, the Financial Times now carries a special section, updated regularly, on “The New Protectionism.”)   

In news from outside the financial crisis last week:

1.  In the first major foreign policy speech of the Obama administration, Vice President Joe Biden proposed to “press the reset button” on relations with Russia, noting that despite policy differences in many areas, the U.S. and Russia could still work together on areas of mutual interest and concern.  The conciliatory tone did not include a review of the U.S. missile defense system, which has angered Russia.  In recent weeks, the Russian government has announced a series of initiatives, including plans to establish naval and air bases in Abkhazia, an air defense treaty with Belarus, and a collective security organization which includes many of the former Soviet republics.

2. A Pakistani court last week released Abdyl Qadeer Khan from house arrest.   Khan is the nuclear scientist responsible for the development of Pakistan’s nuclear capabilities.  He is also believed to have played a key role in the proliferation of nuclear equipment and know-how to North Korea, Iran, and Libya.  Khan’s role in the Pakistani nuclear program made him a national hero, and many Pakistanis believe the evidence against him was fabricated.  But under threat of sanctions, the Pakistani government placed Khan under house arrest five years ago.  His release was greeted by disappointment from the United States and France.  Despite the move, Pakistan is still hoping to woo more aid from—and potentially a closer relationship with—the United States.

3.  With elections for the Israeli Knesset scheduled for Tuesday, polling over the weekend suggested the race would be much closer than anticipated.  Early polling had suggested that the center-right Likud party would cruise to an easy victory, as most Israelis were identifying security as their primary concern and Likud was seen as strong on security.  But recent polling data suggests that neither Likud nor the center-left opposition Kadima party will win a majority, forcing either to enter into negotiations with minority parties to form a government.  Meanwhile, polls from Gaza show a sharp spike in support for Hamas following Israel’s three-week military offensive in the Palestinian territory,  suggesting that Hamas may actually have been strengthened by the campaign.

4.  The longstanding drought in Argentina continues.  The drought, the worst in nearly fifty years, threatens the collapse of Argentina’s agricultural exports.  As one of the world’s second largest exporter of agricultural commodities and livestock, the projected collapse of exports from Argentina threaten global food supplies.  World food prices had declined form their record highs set in 2007-08 in part on projections of increased production from Argentina.  Global market prices for rice, wheat, and soy have already increased 20 percent in the last two months, and with declines now projected for Argentina’s wheat, corn, and soy output, world prices are projected to continue to increase.  In an unrelated development, the Chinese government declared an emergency in response to drought conditions in central and northern China.  The Chinese drought undermined wheat production.

5.  Relations between British Prime Minister Gordon Brown and French President Nicolas Sarkozy stumbled late last week after Sarkozy declared that Brown’s proposal to temporarily cut the value-added tax in an attempt to stimulate the economy would have “absolutely no impact,” arguing that Britain “doesn’t have any industry left” and its banks were “close to ruin.”  Brown is already facing strong domestic opposition from the opposition Conservative Party, whose leader, David Cameron, sized on the French president’s comments.

Five Stories You Might Have Missed

The annual meeting of the World Economic Forum took place in Davos, Switzerland, over the weekend.  The forum is intended to provide world economic leaders an opportunity to meet to discuss issues of global importance.  The meeting is normally incredibly cordial, as the economic focus of the conference provides an opportunity to move beyond traditional political wrangling that characterizes official meetings of heads of state.  This year, however, the Gaza crisis prompted the Turkish prime minister to leave the meting in protest and tension filled the air.  In general, this year’s forum has been dominated by discussion of the global economic crisis  British Prime Minister Gordon Brown warned against a rising tide of protectionism similar to the trend that occurred leading into the Great Depression, while bankers cautioned the U.S. government against political interference in banking operations

In news outside Davos this week:

1.  Provincial elections in Iraq on Saturday were generally peaceful.  Although the final tally will take more than two weeks to complete, preliminary results indicate voter turnout was 51 percent, a slight decline from 2005.  Turnout in Sunni provinces, which had previously dismissed the electoral process as biased against their interests, was particularly high.  With more than 14,000 candidates competing for just 440 seats, there are bound to be a large number of disappointed political parties and candidates.  The question that worries observers now is: how do those who lose the vote respond?

2.  A last-ditch effort to craft a government of national unity in Zimbabwe appears to have been successful, as Morgan Tsvangirai’s Movement for Democratic Change agreed on Friday to join Robert Mugabe’s ruling Zimbabwe African National Union, Popular Front to govern the country.  Once one of the wealthiest and most productive countries in the region, Zimbabwe has gradually collapsed into economic chaos.  With the unemployment rate at an estimated 95 percent, the World Food Programme estimates that up to 70 percent of the country’s population may require food aid in the next six months.  In an effort to deal with the crisis and bring the country’s rampant inflation—currently believed to be running as high as a quadrillion percent (that’s 1,000,000,000,000,000%, incase you’re wondering) under control, the government last week also removed restrictions on using foreign currencies for economic transactions within Zimbabwe.  It is now possible—indeed likely—that bread, gas, and other basic commodities will be priced in U.S. dollars, pound sterling, South African rand, or other foreign currencies.

3.  The crisis over the future of South Ossetia and Abkhazia, which was at the heart of a diplomatic standoff between the United States and Russia lat year, has once again reemerged on the international stage.  Russia has announced plans to construct a new naval base in Abkhazia, a move which Georgia claims will undermine its national sovereignty.  Meanwhile, in an apparent overture to the west, Russia has suspended plans to deploy a missile station in Kaliningrad.  Russia had announced its intention to deploy cruise missile batteries in the enclave last year after the United States moved forward with plans to deploy its missile defense shield in Eastern Europe. 

4.  The Mexican government announced on Tuesday that the country is likely headed into recession, with the economy estimated to contract by as much as 1.8 percent in 2009.  The Mexican economy is heavily dependent on exports to the Untied States, with exports to the U.S. accounting for 80 percent of all Mexican exports and representing about 25 percent of all economic activity in the country.  Already, Mexico’s central bank has cut interest rates in an attempt to stimulate the domestic economy.  Meanwhile, an ongoing conflict between powerful drug cartels and the central government has led some analysts to forecast that Mexico could achieve “failed state” status if it is unable to assert control over the cartels.

5.  Although the fragile ceasefire in Gaza has officially held, a number of fractures are beginning to appear.  On Thursday, Hamas launched rockets into Israel in response to an Israeli airstrike against a suspected arms factory in Gaza on Wednesday.  President Barack Obama named George Mitchell his Middle East envoy, and Mitchell appears to have his work cut out for him.  Arab states are demanding an investigation into alleged war crimes committed by Israel during the conflict in which more than 1,300 Palestinians were killed and more than 5,000 were injured. 

And in a bonus story this week:

6.  A moderate Islamist leader, Sheikh Sharif Ahmed, was declared the winner of Saturday’s presidential elections in Somalia.  Ahmed was the head of the country’s sharia court system that brought stability to southern Somalia in 2006.   But the withdrawal of Ethiopian troops earlier this year has led to even more instability in Somalia, and the political process, now to be led by Ahmed, has been dislocated from the country, now based in neighboring Djibouti.  Somalia has become a haven for piracy in recent months, and the World Food Program was forced to halt shipments to the country due to insecurity.