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China bashing won't save US

By Martin Khor (China Daily) Updated: 2011-10-13 08:02

Nevertheless, the passage of the Senate bill has heightened US-China tensions and raised the potential of a serious trade war.

As could be expected, Chinese government agencies and think tanks are reacting strongly to what they perceive as a protectionist move.

The People's Bank of China, the country's central bank, said the Senate bill would not help resolve the United States' domestic issues such as its trade deficit, low level of savings and high unemployment, but could affect the economy and market confidence.

In the event the Senate bill makes its way into law, a case will most likely be made against the US at the WTO.

WTO rules do not allow countries to impose punitive duties on the basis that a certain country's currency is undervalued. That this is so is appropriate. Valuing currencies to see if they are "manipulated" is very complex and difficult.

For example, the US has also been accused of pushing its currency down through its controversial "quantitative easing" policy, when the central bank pumps funds into the banking system. And is Switzerland "manipulating" its currency by announcing it will not tolerate further appreciation of the franc?

Allowing the currency issue to be a subject of possible unfair practice open to trade sanctions would open the door to many other issues being similarly recognized, such as a country's tax rates, interest rates, labor and environmental standards. There will be no end to having reasons for new trade protectionism.

A US law based on the Senate bill will probably be found to be inconsistent with US obligations in the WTO. But by the time the WTO dispute system panel makes a final ruling (this may take years), some damage may already be done should the US act against Chinese imports in the meanwhile.

China may not take the US actions lying down and could initiate retaliatory action on US goods. Thus, a trade war may be unleashed.

Interestingly, although some well-known American economists like Paul Krugman and Fred Bergsten advocate US action against Chinese imports, some business associations and important newspapers like the New York Times, Wall Street Journal and Financial Times have come out strongly against the Senate bill for its protectionism and trade-war potential.