Trade War with China?

Jessie Hermann
December 23, 2010 • 814 views

The global economy is now slowly recovering from what has proven to be one of the worst recessions since the Great Depression in the 1930s.  Although some progress has been made in reviving the financial system, repercussions of the economic downturn remain present throughout the world.  Because the economy is still weak, any further provocation could push it over the edge into a steeper decline.  It is during this critical period in time that the world encounters a daunting prospect: the possibility of a trade war between its two largest economic superpowers, China and the United States of America.

As the current leaders of the world’s two largest economies, the United States and China are highly influential in the global market.  For many years, these two nations have maintained a successful business relationship, importing and exporting goods to one another.

Recently, however, China has initiated a practice of undervaluing its currency.  By placing the value of the renminbi at a level lower than that of the U.S. dollar, Chinese industries are able to produce goods at lower costs than the U.S.  This enables Chinese exporters to keep their prices competitively low, encouraging Americans to purchase Chinese goods instead of American goods.  As a result, it is difficult for the United States to sell domestically, and vast amounts of money are leaving the American economy and flowing into China. Consequently, the weakening of the domestic economy is leading to the loss of millions of jobs in America.  China’s undervaluation of the renminbi is not only hurting the United States, but is causing the economies of other nations worldwide to suffer as well.

In September 2010, two State Representatives, Representative Tim Ryan of Ohio and Representative Tim Murphy of Pennsylvania, drafted the Currency Reform for Fair Trade Act as a solution to this economic dilemma.  This legislation classifies currency manipulation as a technique for subsidizing exportation and subjects any products found to be exported under such manipulations to special tariffs.

These tariffs would help to offset the subsidies.  This piece of legislation has become known as HR 2378.  Representatives Ryan and Murphy have justified its development because “[w]ith an estimated 2.4 million American jobs lost to China in the past decade because of Beijing’s currency manipulation and unfair trade practices, the time for discussions without repercussions has long since passed.”  The representatives believe that “[t]he Senate must give courage to its convictions, and approve legislation empowering the Administration to stand up in defense of American workers and manufacturers unjustly injured by trading partners who refuse to follow the rules of fair play.”  Although the House of Representatives passed HR 2378 on September 29 with an overwhelming majority of 348 to 79, whether or not the Senate and President Obama approve it, remains to be seen.

If enacted, HR 2378 would likely provoke China into a trade war.  In a trade war, two nations place high tariffs on each other’s exports in an attempt to encourage their citizens to purchase only domestically produced goods.  A trade war between the United States and China would mean an end to economic relations between these two nations and a potential decline in the global economy.

Although many hope that U.S. Congressional action will encourage China to halt her devaluation of the renminbi, a more realistic expectation is that the tariffs will initiate a trade war.  The United States now faces a very difficult decision: the U.S. can either stifle China’s efforts to manipulate the renminbi currency, thus risking a trade war, or the U.S. can concede to the Chinese and allow the global economic to further deteriorate as China continues to exploit the current trading system.  Either approach could yield disastrous consequences for the world and the global economy.

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