US shooting own foot with tariff on Chinese goods

April 5th, 2007

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At present, the US Congress is simmering in antagonism against China for her trade surplus against the US. They see China as a convenient scapegoat for America?s economic woes, accusing her of misconducts that includes currency ?manipulation,? unfair trade practices and so on.

Regarding Congress temptation to label China as a currency manipulator, we find this the case of the pot calling the kettle black. As we said before in How does the US export inflation?, the US, which arguably having the world?s reserve currency, can print its own dollars to pay for foreign imports. This gives the US the enviable power to expropriate resources from foreign countries and exporting inflation to them. Now, is this currency manipulation on the part of the US? China, on the other hand, refuses to play along this game?by not letting her currency float freely, she had turned the tables against the US. In a sense, both the US and China are ?manipulating? their currencies. Both of them are locked in a downward spiral of devaluing their currencies against each other. As the US print their money to pay for China?s goods, the Chinese print theirs to prevent their RMB from appreciating too much against the US dollar (see Why is China printing so much money?). Both China and the US are locked in an embrace of unhealthy co-dependency with each other.

But recently, the US was about to fire the first shot. As the New York times said in In Big Shift, U.S. Imposes Tariffs on Chinese Paper, ?The Bush administration, in a major escalation of trade pressure on China, said Friday that it would reverse more than 20 years of American policy and impose potentially steep tariffs on Chinese manufactured goods on the ground that China is illegally subsidizing some of its exports.? This could set the precedent for more tariffs to come, which if eventuate, will result in a trade war between China and the US. Should this happen, the US will be shooting their own foot. As we said before in What can we expect in a US dollar decline?, the ?reason why monetary inflation had not led to severe price inflation is because of the disinflation effect of cheap Chinese imports.? If the US would be foolish enough to use tariffs to ?solve? their trade deficit problem, their consumers and by extension, their economy will suffer. The Chinese can retaliate by dumping their holdings of US Treasuries, which will result in the nightmare situation that we mentioned in China unwilling to hoard US dollars?what?s the implication?.

We doubt either side will be stupid enough to sabotage each other.