DID A TRADE WAR JUST BREAK OUT?

The U.S. appears to be heading down the path advocated by Paul Krugman.  Someone has convinced the lawyers in Congress that we can improve the U.S. economic situation by levying tariffs on countries that manipulate their currencies.  The WSJ reported on the passing of this legislation this evening:

“The measure would allow, but not require, the U.S. to levy tariffs on countries that undervalue their currencies, which makes their goods cheaper relative to American products. A majority of Republicans lined up with Democrats to pass the bill on a 348-79 vote, highlighting lawmakers’ long-simmering frustration with Chinese trade practices as well as their sensitivity to the faltering U.S. economic recovery with an election looming.”

The US China Business Council has already condemned this bill saying it will hurt U.S. manufacturers, fail to improve the job’s situation and likely lead to higher U.S. prices:

WASHINGTON, DC, September 24, 2010 — Today the US House Committee on Ways & Means voted to advance an amended version of H.R. 2378, Currency Reform and Fair Trade Act. The US-China Business Council (USCBC) strongly believes passage of this tariff legislation by the US House of Representatives will not achieve the stated goals of significantly reducing America’s trade deficit or creating jobs at home, but will hurt American exports of manufactured goods and farm products.

“USCBC believes that China’s exchange rate should better reflect market influences from trade flows and supports effective actions to get to that goal,” said USCBC President John Frisbie. “Counterproductive tariff legislation is just the wrong way to get to that goal and will do more harm than good. The Obama administration’s multilateral and bilateral approach should be supported and continued, not undermined.

“The tariff legislation passed today is counterproductive to getting China to move more quickly toward a market-influenced exchange rate, and it has little chance of significantly reducing the trade deficit or creating jobs in the United States. USCBC, many respected economists, and eight former US Secretaries of Commerce and US Trade Representatives from both political parties [Former Cabinet Officials Letters Opposing Currency Legislation] have stated repeatedly that the exchange rate will not have much of an impact on the US trade deficit or on US employment,” continued Frisbie. “Simple economics would indicate if China’s exchange rate appreciates to the point that it no longer makes sense to import something from China, in many cases, we will import the good from somewhere else, not make it in the US–and we’ll pay more for it. Exporters from Vietnam to Mexico will be the big winners with this bill.

“It’s hard to see how it makes good sense to ‘send a message to China’ by punishing ourselves with taxes on American households and lost export opportunities for manufacturers and farmers if China retaliates. We need to come up with an approach that gets the job done, not pursue divisive tariffs that hurt a broad group of Americans–households, manufacturing exporters, and farmers–while protecting the narrow interests that support this bill.”

I think they’re correct.  You can see my previous response to these ideas here.   In essence, I believe the Krugman’s of the world are wrong.  These sorts of political maneuvers risk a protectionist trade war, higher import prices (as China retaliates and Chinese firms pass along the costs), no improvement in jobs (will the jobs really come back?) and are entirely ill-timed as this only further reduces the standard of living of U.S. households who desperately need to maintain any shred of strength in their balance sheets.  This is no time to begin kicking the one strong leg of the global economy (China).  Let’s hope the Senate crushes this bill.  It might be the only good decision they’ve made in the last 24 months….But I am not getting my hopes up.