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China-bashing season opens as US politics hots up

Posted to Far East Maritime (by on October 11, 2011

The US and China are so inter-dependent that a trade war is not in anyone’s best interests.

In 2010, trade between China and the US reached US$456 billion, up 25 percent over the previous year. And yet before the US Senate is legislation that will impose tariffs on imports from countries that manipulate their currencies.

By “countries” the US means China, who it has long accused of holding down the value of its yuan to boost exports. With an export-oriented economy, it is easy to see why.

The band within which the yuan trades has been widened slightly and when allowed the Chinese currency quickly rises in value. If it were widened further, many feel the currency would continue to appreciate.

In China, the slow and steady way is always popular and this is Beijing’s approach to the yuan that is frustrating the US. Or at least frustrating politicians and their corporate sponsors … I mean constituents.

Thankfully, however, it is a bill that will have little chance of passing Congress.

But the issue is creating a lot of noise. With an election year coming up, politics is dominating the positions of both parties, and China-bashing has become a sure-fire route to gaining populist support.

Unemployment in the US and companies sourcing production in China is an incendiary issue and one easily exploited by politicians. This is driving the push to make China allow its currency to appreciate faster, the theory being that it would increase mainland imports from countries such as the US as domestic demand in China increases.

But a stronger yuan would also make consumer products in the US more expensive. Shoes, power drills, jeans, flat-screen TVs, baseball gloves and the Made-in-China US flags waved at Monday Night Football – and even the football itself ­ – would all go up. With retailers struggling to encourage consumers to spend, this would have a devastating effect on the economy.

Beijing has told the US to address its own problems before hassling the rest of the world, and that makes sound sense. Bashing China may score President Obama some popular points, but it will not magically fix unemployment, excessive debt and poor savings.

As the European Union teeters on the brink, China could soon be facing a sharp drop in demand from France and Germany, the two strongest economies in the EU and its main export markets.

The last thing the fragile world economy needs is to see China plunge into a trade war with the US. There are issues to be addressed between the mainland and China, but imposing punitive tariffs on the country that has the potential to lift the world out of recession is probably not the best way to go about it.