Desperate US protectionism against China will backfire

Can the US forge a stronger relationship with China while also enforcing trade entirely on its own terms?

It looks like becoming one of the defining debates in the West – not just for the US, but also for the UK and others – over the coming years: how to reconcile the need to increase trade and political ties with China while upholding our own democratic and moral principles.

The US Senate yesterday voted in favour of a bill that would punish China for keeping its currency, the renminbi or yuan, weak. China keeps the currency artificially low, which boosts its exports and trade surplus, but distorts the global market.

But no good can come of this bill or the growing rhetoric ushering it through the US political system.

Though the bill isn’t expected to make it into law, its harsh protectionist proposals are rattling the Chinese government, which says the US ‘seriously violated international regulations and sent the wrong signal in escalating trade protectionism’. It is also raising fears of a trade war between the US and China – one that would be costly for both countries and the rest of the world.

This does not sound like the ‘careful, steady, dynamic stewardship’ that Hillary Clinton said the US would apply in its relationship with China. Instead, it's a reflection of the American people’s 'frustration' (also Clinton's words) amid weak economic growth and high unemployment.

As William Galston, a former policy advisor to US president Bill Clinton, wrote recently, it makes for a ‘fateful choice’ for president Barack Obama. ‘Trapped between the imperatives of global diplomacy and pressure from the Democratic base, no doubt he is hoping that the Republican leadership can keep the bill bottled up indefinitely.’

Other economists say the timing is strange, as Beijing has already allowed the currency to appreciate by around 25% since 2005, and has shown a clear commitment to currency appreciation over the coming year.

And restrictions against China could backfire directly on the US economy. ING economists today estimated that tariffs on Chinese imports could add 1% to US inflation and cost American consumers $100 billion. Meanwhile, the ING analysis says, ‘retaliatory threats from China could also hit US treasuries and destabilise global equity markets, hitting confidence at a vulnerable time for the global economy’.

James Roy, senior analyst at the Shanghai-based China Market Research Group, says domestic concerns will drive Chinese currency policy, not American pressure. Like American firms, Chinese businesses are also suffering from a weak dollar, with factory closures and job losses, which could also be described as the result of currency manipulation in the form of two rounds of quantitative easing, Roy says. Plus, if the yuan appreciates too quickly then there is a risk of currency speculation from foreign investors and the overheating that could entail.

But Roy says US politicians tend to use China as a ‘scapegoat’ for US economic woes, which are a result of its own policies, not low-end Chinese production, which has already moved on to other cheaper locations such as Indonesia.

According to economist Arvind Subramanian, the author of a fascinating new book on China’s dominance (which, by the way, is readable online), the world’s inability to get China to raise the value of the yuan is one of several signs of China’s economic dominance.