Spat with China Raises Fears of a Trade War

The new American Treasury secretary uses a Senate hearing room to accuse the Chinese of manipulating their currency, and the Chinese premier uses the Davos gathering of the moguls to accuse America of wrecking the world financial system. Not an auspicious beginning for Sino-American relations in the new era of the great believer in softly, softly diplomacy, Barack Obama.

Tim Geithner has settled into his new job at the Treasury. It no longer matters that Geithner was the Fed’s man on Wall Street while the excesses and chicanery reached their peak. Or that he failed to pay his income taxes despite routine notifications from his former employer, the International Monetary Fund.

Or that it was Geithner, along with his predecessor, Hank Paulson, who decided to let Lehman Brothers go under, bringing the financial system to the verge of collapse. That’s all behind him.

What might be ahead is a trade war, triggered by Geithner when he told the Senate during his confirmation hearings that he believes China is “manipulating” its currency to maintain it at a low value so as to stimulate its exports. “Manipulate” is the word that upsets the Chinese, and imports are the things that most upset the trade unions and congressional Democrats who see them as destroying jobs in America – never mind the benefits to consumers.

There are three reasons to believe that this was not just another blunder by Geithner. The first is that the administration rushed out a statement that Geithner was saying no more than Obama had said on the campaign trail.

The second is that Geithner was reading from a prepared statement, not merely making some remarks in response to a question. “President Obama, backed by the conclusions of a broad range of economists, believes that China is manipulating its currency,” wrote the then-nominee. Premeditation matters, and the use of the inflammatory word “manipulation” clearly was a carefully considered act.

The third is that Geithner is well aware of Chinese sensibilities. He and his family have a long association with, and knowledge of, the politics of Asia and China. It would have been unusual in past years for any important Chinese official to visit America and not have a private tête-à-tête with Geithner, who has studied Chinese and Japanese, and lived in India, Thailand and Japan, as well as in China. His father is director of the Asia programme at the Ford Foundation. They know just what will set Chinese leaders’ teeth on edge.

Which Geithner most certainly did. China’s communist leaders, lacking democratic legitimacy, know that unless they can keep job losses down as their economy cools, they will face even more social unrest than has been bubbling to the surface in recent years. They know, too, that the recession in America and Europe is cutting into their exports, causing factory closures and layoffs. The last thing they want is to see the yuan appreciate further against the dollar, reducing the competitive advantage that made-in-China goods have in America.

Then along comes Geithner to bring smiles to the face of Chuck Schumer, the China-bashing New York senator who has been calling for high tariffs on Chinese goods to offset the advantage the Chinese gain from manipulating the yuan, rather than letting it float. “This is a big step,” Schumer announced with unconcealed glee.

Geithner’s charge is not without substance. China has indeed kept its currency undervalued to stimulate its exports, and although Paulson’s trips to Beijing in pursuit of a strategic dialogue did produce a bit of a rise in the yuan, that stopped abruptly when the Chinese economy ran into strong headwinds.

With the American economy in recession, and the taxpayers about to spend perhaps $1 trillion to get it moving, the notion that tax cuts and government spending will end up buying goods made in China by Chinese workers is increasingly unpalatable. That’s why the stimulus package includes “buy American” provisions.

In the past, free traders could cite history, arguing that the Great Depression was prolonged by the protectionist wave that rolled across the world. Or they could cite the great Adam Smith, who demonstrated the benefits of free trade. But voters are neither historians nor economists: few have ploughed through the volumes on the Great Depression, or Smith’s Wealth of Nations. Besides, the long-term inefficiencies created by protectionism pale by comparison with the jobs lost here and now, especially in the minds of trade-union leaders and the Democrats they have helped to elect.

Robert Cassidy also has his doubts about the benefits of our trade relations with China. Cassidy, President Bill Clinton’s assistant US trade representative for the Asia-Pacific region, is the man who put together the deal that persuaded Congress to normalise trade relations with Beijing and allow China to join the World Trade Organisation (WTO). Now, regrets he has more than a few. Last week he told an audience at the liberal Economic Policy Institute in Washington that Beijing’s manipulation of the yuan was making American goods uncompetitive in China, and inducing American companies to close factories here and move production to China.

For the past decade China has shipped us goods, and we have shipped China bits of paper with pictures of American presidents. China has shipped those dollars back to us to buy the IOUs our deficit-ridden government is selling. Now the Treasury is about to step up its borrowing to fund the stimulus, the car industry, the banks, a partial government takeover of the healthcare industry, and myriad items on the wish lists of long-frustrated congressional liberals. If China decides it doesn’t want to buy the new IOUs, interest rates in America will climb, offsetting the effects of much of Obama’s stimulus package. Secretary Geithner might then find that he can’t peddle the billions in IOUs he will soon be issuing, and regret emboldening the Schumers of the world to believe that the Obama administration intends to replace talk, talk, with war, war – trade war, that is.