In his latest in the Washington Post piece, Robert Samuelson – arguably the best left-of-center columnist in the business – urges a ‘get tough’ trade policy with China. Last week the Senate introduced legislation authorizing punitive taxes.
According to China’s critics, the yuan is grossly undervalued, giving China an unfair trade advantage. But this is only part of the story.
The U.S. and China trade to the tune of $500 billion a year. For the most part, China sells us low-cost consumer goods while we export foodstuffs, auto parts, industrial chemicals and avionics to the Chinese.
The exchange hasn’t been even-steven. The U.S. has incurred monthly deficits while China adds to its whopping trillion-dollar surplus, which until recently it used to buy U.S. Treasuries. In this way, China in effect financed our out-of-control (“deficit”) spending. And we were hooked.
Meanwhile, the dollar has been in steady decline for years. China’s holdings of U.S. Treasury holdings have lost 30% of their value!
Is it fair for us to brand China a ‘currency manipulator’ while at the same time debasing our own currency through quantitative easing? The fed prints money out of thin air to buy our own unsold bonds (QE and QE2), keeping bond prices high, interest rates low, and service on our $14 trillion debt manageable.
To hedge against further slippage, China has been converting its dollars into hard assets, especially gold, copper and oil. And buying other countries’ bonds. Over the past two years, China has made more loans to other developing countries than the World Bank.
Be careful what you wish for…
If China were to let the yuan shoot up, by definition the dollar would go down. Currencies are valued in relation to one another. And yet Secretary of the Treasury Geithner insists we have a strong dollar policy.
In fact, the Chinese could speed the dollar’s collapse by dumping Treasuries on the market at a propitious time. They probably won’t, since they themselves hold so many dollars, but it’s a possibility that U.S. policy-makers should keep in mind.
Congress makes noises about punitive tariffs and taxes, obviously having forgotten the Smoot-Hawley Act back in the 30s, which turned a recession into the Great Depression.
It appears that China holds the better cards. If we want to continue to do business with Chinese – and no one is forcing us to do so, effective diplomacy is in order. Name-calling and trade barriers won’t elicit the desired results.
Amy H Laff is a StateBrief.com partner. A graduate of Univ of Penn and Stanford Law School, Amy practiced law and mediation on the east coast before relocating to the Valley, where she founded and chairs the AZ chapter of the Republican Jewish Coalition. Amy makes frequent media appearances, including AZ Law Channel and Tony Katz Radio Spectacular. Additionally, she works with companies and candidates on branding and communication. 
