Barack Obama

Talk of trade war is too frightening

PUBLISHED : Wednesday, 12 October, 2011, 12:00am
UPDATED : Wednesday, 12 October, 2011, 12:00am


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For years now wiser heads have prevailed over attempts in the US to punish China for holding down the value of the yuan. The issue has remained contained within bilateral dialogue. But it is easily reignited. Now is a new season for it, with election politics coming into play as Americans enter the preliminaries of next year's presidential campaign. True to form, legislation has been introduced in the Senate which would impose tariffs on imports from countries that allegedly manipulate their currencies.

A number of factors set this latest round of China-bashing apart from the usual scapegoating for loss of US manufacturing jobs, aimed at a domestic audience. The most recent is the timing of last week's assault by US President Barack Obama on China's trade policies, in which he accused it of 'gaming' the system to its advantage by keeping the yuan weak. This came after US Federal Reserve chairman Ben Bernanke told a congressional committee that China's currency policy was blocking progress towards a normal global economic recovery. The move in Congress also comes as the stalled US economy teeters on the brink of a double-dip recession, and Europe's debt crisis increases the risk.

The Senate's vote to debate the bill prompted a rare co-ordinated response from China's central bank and the ministries of foreign affairs and commerce warning of the risk of triggering a trade war and calling on the US to address its own problems.

Obama played to both sides in pre-election politics, stopping short of backing the legislation and raising concerns about violating World Trade Organisation rules. He knows that after passing the Senate the legislation faces stronger opposition in the House of Representatives.

Both sides have a point, which constitutes a dilemma. If China allowed the yuan to appreciate significantly, that would encourage domestic consumption, which would be good for world demand and thus a boost for economic recovery. But policymakers would not relish the prospect of raising the cost of China's exports while economic uncertainty threatens contraction in its main markets. This explains Beijing's calls on the US and Europe to address their own problems of excessive debt and inadequate savings. However, bitter political division in the US over weak economic growth is an obstacle to such discipline.

As long as growth is stalled, heightened Sino-US trade friction is to be expected. It is in China's best interests to get on with major trading partners. In that respect the bill before the US Senate threatening retaliation is not very helpful, even if it is unlikely to become law. Bilateral dialogue and persuasion offer the best way forward for two economies so linked that even talk of a trade war is frightening.