Saturday, April 1, 2006

U.S.-Chinese relations and American consumers dodged at least one bullet last week, when Democrat Charles Schumer and Republican Lindsey Graham postponed a Senate vote on their bill that would have slapped huge tariffs on Chinese goods imported into the United States. Having just returned from a visit to China, the senators declared Tuesday that Chinese leaders had conveyed to them a recognition that China’s currency, the yuan, needed to rise in value against the dollar.

“Now that we’re on the path to progress,” Mr. Schumer said, “we don’t have to fire the so-called nuclear weapon, but can hold it in abeyance.” Metaphors aside, Mr. Schumer was not speaking hyperbolically. The 27.5 percent tariff could unleash a trade war at the very moment the world’s latest round of multinational trade liberalization has ground to a virtual halt. Moreover, with Chinese President Hu Jintao scheduled to visit the United States this month, a Senate-passed tariff bill, which had already won the support of 67 senators in a procedural vote cast last April, would have invited a tit-for-tat response that could easily escalate out of control.

It is indisputable that the Sino-American trade imbalance has become immense. Last year America’s trade deficit in goods with China reached an all-time bilateral record of $202 billion, reflecting the difference between U.S. exports of $42 billion and imports of $244 billion. (The trade deficit with China totaled $69 billion in 1999.)

As that trade deficit has soared, charges have mounted blaming China for pursuing a mercantilist trade policy by maintaining a fixed, undervalued exchange rate with the dollar. Last July, China responded by revaluing its currency by 2.1 percent and announcing that the yuan would be allowed to float within a very narrow band. Since then, the yuan has appreciated another 1 percent. Needless to say, believing that the yuan is undervalued anywhere from 15 percent to 40 percent, Messrs. Schumer and Graham and many U.S. business interests have not been satisfied.

An appreciating Chinese currency would tend to make Chinese goods more expensive in the United States, although it is very doubtful that U.S.-produced goods would displace imported Chinese products. Instead, the share of the U.S. market captured by India, Vietnam and Bangladesh would probably increase. An appreciating yuan would also make American exports to China cheaper and more competitive. However, the relative dearth of U.S. exports to the massively industrializing Chinese economy strongly suggests that Beijing has adopted a state policy of directing its huge purchases of capital-intensive goods to Asian and European suppliers. A 27.5 percent tariff on imports from China would needlessly penalize American consumers and threaten to ignite a trade war that would make today’s current bilateral trade problems pale by comparison.

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