Sunday, March 26, 2006

US-China trade war looms

If the latest US rhetoric (blaming China for our economic ills) turns into action (slapping Tariffs on Chinese imports), the US could end up in a dollar crisis much sooner than many think.

US-China trade war looms :

Senators' protectionist anger over $200bn trade gap puts pressure on Beijing and risks damaging future strategic relations.

American senators could vote this week to slap tariffs of 27.5 per cent on all Chinese goods, amid a rising clamour of protectionist anger on Capitol Hill.

The sponsors of the so-called Schumer-Graham Bill were in Beijing last week - Chuck Schumer's first official trip overseas in 25 years - to press home the message that China's cheap currency gives it an unfair advantage over the Americans. Schumer, a Democrat who represents New York, and his Republican co-sponsor, Lindsey Graham of South Carolina, have been promised a vote on the measure by the end of March.

Some analysts have compared the bill with the infamous 'Smoot-Hawley' tariffs of 1930, which kicked off a tit-for-tat transatlantic trade war and helped turn the stock market crash of 1929 into the Great Depression. Phillip Swagel of the American Enterprise Institute said that unless Schumer drew back from the brink this week, he could become known as the Smoot of the 21st century: 'He would go down in history as the man who crashed the US economy.' He said the anti-China senators were likely to 'declare victory', having delivered their message to the Chinese in person.

But Stephen Roach, chief economist at Morgan Stanley, who met the senators - and Beijing officials - in China last week, said the rhetoric on Capitol Hill was already damaging a fruitful trading relationship. 'China is deeply troubled over the outright hostility from an increasingly xenophobic US Congress,' he said.

He said the trade deficit was the flipside of America's insatiable demand for foreign goods and its lack of savings. The US consumes more than it earns and borrows the difference, much of it from Asian central banks, including China's.

'The danger is that the United States views China with a growing sense of distrust - poisoning the chances for strategic co-operation and squandering one of the greatest opportunities of globalisation,' Roach warned.

Chinese premier Wen Jiabao made it clear that he has no intention of acceding to US politicians' demands. 'It is unfair to make China a scapegoat for structural problems facing the US economy,' he said. China has repeatedly said that it plans to float its currency eventually, but it fears the impact of 'big bang' flotation on its fragile financial sector.

Ikenson warned that by threatening punitive sanctions, America would exhaust Beijing's goodwill, which it might need for tougher geopolitical issues in the future: 'If we continue to hound them about their currency, we're not going to have enough left to push them on issues that really matter.'


Out at the peak said...

My company has switched our manufacturing over to China because we have to meet goals with cost erosion.

Technology costs continue to go down partly thanks to foreign countries making parts and assembly for less.

It's hard to convince VPs, etc to stick with American labor since it's a competitive landscape. Eventually clients can't buy anything because they can't afford it when out of work. Basically, this is a long drawn out process that cuts off our foot. At this point, we need to have damage control.

Anonymous said...

Good luck trying to bully China over ANYTHING at this point in the game.

We have handed them this situation of superior economic strength on a silver platter over the past decade. There is no way that China's going to lose this economic fight.

And it's silly for us to blame them when they get the upper hand. We put ourselves in the one down position.

For us to keep the upper hand with China, or even have them consider us to be their "equals" in the game, China would have to have the same kind of inferiorty complex that most nations we "have the upper hand with" do.

Lordy did we miscalculate this one!

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