Thursday, September 16, 2010

Are We About to Start a Trade War

This is just some first impressions from today's NY Times article on some new developments in our dispute with China over currency.


The United States brought two cases to the World Trade Organization on Wednesday, accusing China of improperly blocking imports of a specialty steel product and denying credit card companies access to its markets. The move came just hours before House lawmakers demanded action on the currency issue.
This isn't such a big deal and I like going through the WTO, it enhances the power of and prestige of that organization in advance of when we're really going to need it as one among several similarly sized economies.  I don't think it will get anything done but this is the kind of symbolic action I expect when people are baying for blood and the government knows better than to follow through and give people what they want.  It's not smart economically but giving a show of responsiveness can get people to put the pitchforks down so so far, so good.

This is a little more worrying:

In his testimony, Mr. Geithner is not expected to rule out declaring China a currency manipulator, a finding that could lead to retaliatory trade measures. The administration has so far refused to take such a step, relying instead on persuasion, though with little success.
But still, it's a good idea to not rule out any options in advance of negotiations so I'm not too concerned yet.  Having these notions talked about in Congress makes me a little nervous though because a trade war with China would be a very bad thing.


The office of the United States trade representative, Ron Kirk, said the timing of the new W.T.O. cases was unrelated to the other economic tensions with China.


Not so sure about this:

Mr. Grassley added: “The administration should go one step further and bring a case against China’s unfair currency manipulation at the W.T.O.”
From what I remember about the WTO I don't believe it has very good rules regarding currency manipulation.  Trying to bring this case would result in trying to force the issue into a frame it's not really suited for, which would probably just piss the Chinese off and result in a lost case for us, making both us and the WTO look weak.  Better to propose to renegotiation WTO rules on currency (perhaps a clearer IMF role and powers would be more appropriate?).  This would send a clear enough message that we're very, very serious and give us an option for real action in the future.  Won't solve anything this political cycle but I'm honestly not at all worried about our current deficit with China.  I'm much more concerned about the situation 20 years down the road when we're not as dominant as we are today and this action is trading what is really a minuscule gain today for potentially significantly weakening ourselves down the line.  Best not do this.

Though Mr. Grassley deserves kudos for suggesting multilateral methods which too many aren't recently.  So while I disagree, I still recognize he's making sense.

This is what I was talking about when I mentioned a forced issue:
Mr. Levin urged the administration to bring a case before the W.T.O. arguing that China’s currency policy amounted to an illegal export subsidy. He said he thought the United States could impose countervailing duties against China without violating its own obligations under world trade rules.
Currency manipulation is a bit more complicated than an illegal export subsidy.  I can see the logic as a lowly blogger but I'd be willing to bet it won't fly in formal hearings.  Best not make fools of ourselves in a forum where we aren't the only ones making the case.  This will seem logical in the US Congress where everyone agrees.  It will seem far less logical once the other side gets to talk too.

This is all good information and makes sense:

China permitted the value of the renminbi to rise about 20 to 25 percent against the dollar from 2005 to 2008, before the government reimposed a currency peg to support its export-centered economy after the global financial crisis.
C. Fred Bergsten, director of the Peterson Institute for International Economics, a leading research organization here, told House lawmakers on Wednesday that a similar increase over the next two to three years would create about 500,000 jobs. He said it would reduce China’s current account surplus by $350 billion to $500 billion, and the American current account deficit by $50 billion to $120 billion.

The United States should seek to mobilize the European Union and countries like Brazil, Russia and India to press China to realign the renminbi, and should seek W.T.O. authorization to impose restrictions on Chinese imports if it does not do so, Mr. Bergsten said.

I could quibble a bit with the numbers, some of the reading I've been doing has suggested that the US current account deficit would reduce by less because of import substitution from other low wage countries (Chinese imports compete with other imports for the most part, not domestic US industries) but it's close enough it's not worth arguing about.
The last paragraph is particularly notable.  I think the best point of comparison with the current situation in China is the Plaza Accord (in reverse really, but still comparable).  We need to manage this appreciation carefully and that will take widespread international agreements.  We have not chance of doing this bilaterally.  On the simplest level the Chinese give every indication that they are more focused on traditional power roles than they are on simple economics.  Just because the economic determinist camp has taken over here doesn't mean it has everywhere.  Even though a trade war with China will hurt them more economically than it will us, it will hurt us more in other areas, particularly in international prestige, than it will them, so for them this is a winning proposition.
The second thing we should keep in mind is that China remains an authoritarian country.  They have a much greater abililty to control and fine tune the adjustments necessary for the kind of interventions that will be part of a trade war over currency.  We're going to have pretty much one shot at whatever we try to do unilaterally before our interest groups go nuts.  While democracy is good at a lot of things, fine economic manipulation isn't one of them.  This plays to their strengths and our weaknesses.  Our only options are multilateral, unilateral action is certain to lead to us looking weak and likely foolish as well so is best avoided.
I'm glad to see the NY Times article makes little mention of unilateral action, I'm eagerly awaiting Krugman's next post suggesting we seize the day and attack now to prove I'm not wrong that there's a significant constituency in favor of unilateral punitive action.

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