Tuesday, 18 October 2011

Sino-American protectionism: more politics than policy

Everybody knows the Chinese manipulate their currency (the renminbi).  Last year nearly half of America's trade deficit was with China. So why is nobody doing anything about it?

It looks like the politicians are trying...

Last week the Senate passed the Currency Exchange Rate Oversight Reform Act of 2011 - an act which would pressurise the White House and the Ways & Means committee (the group that writes tax legislation for consideration by the House of Representatives) to evoke tariffs against China. The House of Representatives now have the opportunity to vote the bill through and have it sent to the President for veto or enactment.

Surely this is a done deal. The issue has strong bipartisan support in both houses of Congress. So much so, in fact, that the House passed a similar bill a year ago which the Senate could have run with.

...but appearances can be deceptive!

They didn't though. Because this issue is arousing more politicking than policymaking. For those congressmen (and women) representing constituencies that have lost jobs to China, supporting the bill demonstrates their commitment to countervailing tariffs (retaliatory taxes on imports) - even if they assume it will not become law.

Neither the White House, nor the Republican leadership want this bill to pass.  The use of cheap Chinese labour has become endemic to the US economy. An acceleration of revaluation would cause cost increases for consumers and businesses across the Union. Many firms either rely on cheap imports or have actively shifted their own production to China.  Whilst the latter might stand tall as a reason to legislate, it provokes significant business lobbying to prevent a trade war between the two countries.

Business as usual

At the moment, behind closed doors, policymakers can admit that legislation would not be helpful. Afterall the adjustment is taking place: the renminbi continues to appreciate at around 5% per annum against the dollar; Chinese wages are rising faster than US pay; and rising fuel costs create incentives to manufacture at home rather than abroad. These themes should play out in the US's favour over the coming years.

The concern would be that as China's economy has lost steam this year, the People's Bank of China may want to switch from their current tightening policy (higher reserve ratio requirements, higher interest rates, a higher exchange rate), to a loosening policy.

If a more hawkish (tightening) stance meant the renminbi's climb slowed, stopped or reversed, then it will become increasingly difficult for congress to remain all talk and no tariffs.


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