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Congress Fires Shot Across China’s Bow

Written by SuperUser2.

(Editor's Note: See more coverage on China-U.S. trade row, including the take on the topic at the FCIB International Round Table in New York, in the latest edition of NACM's eNews. Click here to view).

(Business Intelligence Brief) This may not be the most apt analogy though - this is perhaps more akin to putting a stick in a hornet's nest given the likely reaction from China. At this point, the vote from the House of Representative was 90% campaign politics and 10% real trade strategy.

The vote was overwhelming and was indeed bi-partisan but there was no overt support from the White House and the Senate is not likely to pass a companion piece of legislation. As symbolism, it was important in that is showed just how unpopular China is in the US today. The reactions from China were predictable - angry denunciations of the action and threats to place limits on trade. The standoff is the same as has existed for the last several years and there is nothing in this gesture that will really alter the situation in either nation.

The Chinese clearly manipulate the value of the yuan to ensure that it does not interfere with their export centric economy. They are hardly the first nation to manipulate the value of their currency and they will certainly not be the last. Japan recently took direct steps to weaken the yen as they became concerned about the impact its strength was having on their exports and this move was far more interventionist than the actions taken by China. The point is that nations manipulate their currency values and probably always will. Some of the techniques are more subtle than others - China is pretty blunt in that it simply pegs its currency to the dollar but every nation affects the value of its currency through the interest rates set by its central bank.

What makes the issue with China so emotional is that Chinese exports have become so ubiquitous and so many US companies have been affected by the competition from Chinese business. The low value of the yuan is an important factor in making Chinese goods cheaper but it is hardly the most important. China has many trade advantages that go far beyond the yuan value - low wages, low production costs, subsidies for exporters, a fully fledged trade infrastructure, cooperative banks and so on. Even if China allowed the yuan to appreciate, the country would still enjoy substantial trade advantages.

Analysis: The actions by the House were designed primarily for domestic consumption. Voters are angry and the last thing they want to hear is that their Congressmen are favoring China over the companies in the US that could be hiring. The challenge to this kind of strategy is that the Chinese are not without their own ability to react. The most obvious method is to cut off access to the Chinese market and this tactic has been used often. Suddenly a US company is shut out of the one of the fastest growing markets in the world and that costs jobs. China has longer term influence as well and this poses a greater threat.

The Chinese have purchased close to $1 trillion in US debt - almost 30% of all the debt the US has sold in overseas markets. The US remains dependent on China as far as debt purchase is concerned - at least as long as the US wants to avoid addressing its budget crisis through higher taxes and cuts in spending. The fact is that Congress could actually send a pretty effective message to the Chinese. If the members of the Senate and House actually addressed the deficit with some sober attention to actually balancing the budget, the US would not need to finance its obligations by selling to the Chinese and that would allow the US to regain some leverage in these trade disputes. But it seems to be easier to just stomp one's feet and complain.

Chris Kuehl, of Armada Corporate Intelligence, is NACM's Economic Advisor

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