Editor's Note: Christopher Alessi is an associate staff writer at CFR.org. This is an Analysis Brief, reprinted with the permission of the Council on Foreign Relations.
By Christopher Alessi, CFR.org
The U.S. Senate passed legislation on Tuesday that would tax the goods of countries with "misaligned" currencies (WSJ). The bipartisan measure is meant to target China, a trading partner the United States has routinely criticized for devaluing its currency. China warned that such a move could instigate a trade war (BBC) between the two nations, threatening the global economy.
U.S. officials have argued that by artificially holding down the yuan, China is keeping its exports inexpensive for U.S. consumers, thus undermining the U.S. manufacturing sector. The measure has gained traction because of the perception that China's alleged unfair trade advantage (NYT) is costing U.S. jobs and contributing to an already-bleak employment outlook.
Leaders in the House of Representatives have voiced opposition (Politico) to the bill, indicating the measure is unlikely to be taken up in the lower chamber. The White House has not taken an official stance on the bill, but cautioned that it could be inconsistent with World Trade Organization rules.
Still, the measure is "very significant" from a symbolic point of view, explains CFR senior fellow Edward Alden, who says the Senate's action gives voice to growing U.S. frustration over China's currency and trade policies. Indeed, the United States posted a trade deficit of $273.1 billion (Guardian) with China last year. U.S. critics contend the yuan is undervalued by as much as 40 percent. Officials in Beijing argue that U.S. economic policy is to blame for the imbalance, noting that the yuan has appreciated (Bloomberg) by 25 percent since China removed its peg to the dollar in 2005.
A recent study (PDF) examining the effects of Chinese competition on local U.S. labor markets between 1990 and 2007 found regions with the greatest exposure to Chinese imports saw manufacturing employment decline by one-third more than regions with limited exposure.
Read: How Should the United States Address Chinese Trade Imbalance?
The authors concluded that higher exposure to China also led to larger increases in unemployment and other government benefits, making the overall U.S. economy less efficient and competitive. While one of the authors, Gordon Hanson of the University of California at San Diego, thinks the gross impact (CSM) of trade with China is positive, he says the research demonstrates "just how bad conditions are for low-skilled workers in the U.S."
However, CFR's Alden says that if the Senate bill became law, the United States would likely be subject to retaliatory measures from China, the largest holder of U.S. debt. Beijing has already warned that in addition to sparking a trade war, unilateral action by the United States could undermine bilateral relations (Bloomberg) on other fronts, including cooperation on dismantling North Korea's nuclear weapons program.
Advocates of the legislation, including Senator Charles Schumer (D-NY), argue that it would force China to allow its currency to appreciate significantly faster, creating more than two million U.S. jobs (Politico). Opponents, like House Speaker John Boehner (R-OH), say the legislation is "dangerous" and predict an inevitable trade fallout with Beijing.
Read: Confronting the China-U.S. Economic Imbalance.
Analysts tend to agree the bill would not do much to advance U.S. economic interests–or U.S. ties with China. It could "prompt China to slow or stop yuan appreciation to make a strong political statement that it will not be bullied–particularly not by a government that doesn't have its economic house in order," writes Dan Ikenson in Forbes.
Writing for Citywire, Chris Marshall notes that "restrictions against China could backfire directly on the U.S. economy." He cites ING economists who estimate that "retaliatory threats" from China could hit U.S. treasuries and destabilize global equity markets, shaking the confidence of an already-fragile global economy.
What is happening to the brains of our lawmakers!? First, they have paralysis… critical items cannot move through. Now, finally they have bi-partisan support to pass a bill… they passed a stupid disastrous bill.
Look, if this bill becomes law, we will have tariff wall against China and China will return the favor. So on one hand China will not sell products here, but these jobs are NOT coming back to US; the Chinese products will be replaced by products from other low-wage countries. On the other hand, we cannot export to China, thus losing more American jobs. So we have NET loss of American jobs. I thought they want to create more US jobs!???
Worst of all, as if the global financial crisis of 2008 devised by Wall Street greedy idiots is not enough, the brilliant US senators want to finish the job by initiating the process which will force the two largest economies of the world to both lose jobs… here comes the real global DEPRESSION. God bless us all??!!
Why anybody in his/her right mind would design such a self-defeating punishment tool!!
Why not? If it musters some nationalistic sentiments in the electorate and wins votes, keeps you in power, who cares???
The most powerful force on the planet is the US CONSUMER and only because USA is the most populated advanced ecomony.
US consumers voted in every administration good and bad
US consumer built China. No you couldnt build your factories in SE Asia, Central America etc... in little countries that would never rival USA. Why?? US consumer demanded cheaper goods.
I thought Americans hated tax and loved free enterprise. Many goods dont have any import tax but those who do are a TAX that the US consumer will pay. Protectionism turned the ressesion of the 30's into a great depression, now we considr doing the same? Article stated 1990's was the start of USA imports of chinese goods by chance the same time USA entered into initial FTA's, Why blame the FTA's when it was not the cause of declining US manufacturing.
Mexico drugs??? do you think mexico made them and suddenly USA started buying them??? No, demand from the US Consumer started the cycle and is having devistating effects on your allies.
Now wall-street is your eminy??? Rubbish.
US Consumer are still the largest force on the planet.
Take some responsibility, learn from your mistakes, blame the real causes and fix them.
Obviously, your are crying all the way to the bank. You are part of the problem. I have already responded after this for your edification at length. Let me just say it is trusted companies we usually buy from where ever they source. These companies have a mandate to make a profit, nothing more. Like consumers that flocked over the border to Mexico to buy gas a $2.00 a gallon instead of $4 here, it is a simple matter of economic advantage, so companies have flocked to China, for instance, because their cheating has lowered commodity prices, lower labor, and pre-Teddy Roosvelt regulations that killed American worker regularly. Their doing exactly what you would expect. The cost of that however burdens every American as their percentage of a huge trade-deficit that must be paid on some day of settlement. Likewise, social costs associated with jobs gone are not free and are a tax on every American. There are indirect consequences like domestic business go out.
Since companies have a social conscience mainly for building their PR, they have virtually no social conscience. It is however government's job to see to its people's well-being. It is governments only currency. Failing that they are thown from office. In the case of the Arab Spring, they are toppled. The problem is the government has been coopted by corporate interests, and is now vested as members in the status quo. The government has let the people down, both parties in the name of free trade. Germany still maintains domestic jobs through industrialization and is still a net exporter. We could be too, if our government had a strong, definitive "national industrial policy" that did so. All your whinning is possibly because you have bought hook and sinker the philosophy we must run a continual negative trade-balance. That is sophistry plain and simple. Think about it.
Oh please enough of such stereotype boasts that Americans as stucked with.
USA Government is BANKRUPT! America's national debt of US$14 trillion would still be there – 20 years later.
Asia is now the biggest growing consumer market – and will become the largest in 5 years time. Because there are nearly 3 billion prospering consumers.
I repeat – British pound was yesterday's world currency, US$ is today – the future world currency is the Chinese Yuan.
Until Americans learn to be prudent and not buy houses or use their credit cards which they cant really afford – USA will continue to backslide. The current difficult financial situation is a good wake up call for your Americans. Start saving and be prudent, because your country is BROKE!
American bragging is no longer receiving any audience because the whole world knows now Americans are very poor!
Tarrifs are not the answer. Virtually everybody we have a negative trade-balance with represents American jobs gone elsewhere. The problem is we don't make enough of what we consume, or enough other stuff for export. We are an "unbalanced economy" We maintain our standard of living only by borrowing money as a nation running a huge negative trade-balance It is a dead end! It is not sustainable going further and further into debt. We need to neutrialize the negative trade-deficit. The only way we can do that is "produce" more here, and that will also mean robust American employment. It will return us to a solid, robust economy.
It fixes our problems in the short and long terms. Like Germany we can have an "industrial policy" that still provides industrial jobs to it citizens, and maintains itself as a net exporter. We have exported our technology and jobs for decades. It was camouflaged by the long lasting housing bubble. Now, we look around and the jobs are gone and the middle-class is disappearing. In the mean time, American "industrial production" has fallen of a cliff.
I say reduce taxes on domestic production over 5-years, while raising sharply taxes on foreign goods targeted to this market over 5-years. The fed. gov. can get with states to offer declining incentives to invest here over 5-years. These imported are not so cheap when you factor in the social costs of unimployment insurance food stamps, and medicade. Add to this the indirect social costs of people dropping car insurance, life insurance, and forgoing a lot of things, and Main Street businesses going out. All these unemployed people walking around are not free. Government only stays in power when the well-being of the masses are assured. Imported products are very expensive to this economy, indeed.
No, this isn't protectionism of the 30's. Jobs have not dried up, just gone elsewhere. The second largest economy in the world doesn't play by our rules and considers them irrelevant. We need a new set of rules that allow us to compete. We need an American "industrial policy" that enables us to win! Producing nations win, consuming nations become debtors.
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