Trade Tensions Grow with Beijing

02/04/2009 11:56 am EST

Focus: MARKETS

Jim Trippon

Editor-in-Chief, China Stock Digest

James Trippon, editor-in-chief of China Stock Digest, warns that any protectionist measures the US takes against China would wind up hurting both countries. 

The rapturous media reception given to President Barack Obama and his team has obscured some early trouble clouds. Obama's Treasury Secretary, Timothy Geithner, fired the opening salvo, telling congressional questioners that he believes China is "manipulating" its currency.

The term "currency manipulator" has very serious legal implications and if the label sticks, Washington will be compelled to retaliate against Beijing with trade penalties to get relief for perceived unfair trade practices.

Geithner [also] invoked Obama's name in making his accusation against China. As he put it, "President Obama—backed by the conclusions of a broad rage of economists—believes China is manipulating its currency." This follows a formal US complaint to the World Trade Organization (WTO) by Susan Schwab, trade representative under the Bush administration, [over] the many Chinese government-funded incentives that make Chinese imports so remarkably cheap.

Many congressmen and economists have contended for years that China has kept the value of its currency artificially low by as much as 40% to gain an unfair pricing advantage in trade with the US. China uses a variety of trade subsidies, tax grants, and rebates to promote its products by lowering prices.

Remember, the last time the US threw up harsh trade barriers (the Smoot-Hawley Tariff Act of 1930), American trade was abruptly cut in half and a severe economic recession became the Great Depression of the 1930s. A trade war with our most important trading partner is the last thing America (or China) needs at a time like this.

The Chinese know this and they are taking Geithner's words very seriously. The People's Bank of China, the country's central bank, immediately rejected the Treasury Secretary's words. In a statement that reminded Washington of the dangers of trade wars, the Chinese bank's governor warned, "We should avoid any excuse that might lead to trade protectionism."

Like all Americans, we are eager to see US jobs protected fully and fairly. No one should have an unfair advantage that puts a single American out of work unfairly. Yes, it's true that China enjoys a growing surplus in its balance of payments with the US and most of the world. But China remains one of the US's biggest customers for high-tech and resource products. A tariff war would send the Chinese looking for other high tech and resource vendors, something they would have no trouble finding in today's economic climate.

Even worse, Beijing holds most of the cards in the new political and economic realities of 2009. America is a debtor nation and China holds the largest single slice of America's foreign debt, amounting to almost $700 billion and rising daily.

We clearly cannot afford a trade war or a currency war with Beijing. But Obama's hand-picked Treasury Secretary is swinging a big stick.

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