China vs Schumer - postponed

Good news on trade - it looks like we aren't going to have the threat of a tarrif war with China, after all, as Senators Schumer and Graham decide to junk their threat for 25% tarrifs on Chinese goods as retaliation for currency manipulation. The issue is an odd one. We mentioned in a memo a few week's back on Trade. There is almost universal agreement that China's action is unfair. This is true among progressives also - ranging from Robert Rubin on the one hand, through to this release from the normally domestically minded EPI on the other. What to do about it was less clear. The Senators were in a bind. They could let the threat drop, and lose face. Or they could bring it to a vote, and annoy the chinese, invite retaliation at the WTO, damage Treasury Sec Paulson, and risk making matters worse. That they decided to eat it up, in the end, was the wise course. What comes next? My best understanding is they go back to the drawing board, and try to come up with some WTO friendly measure akin to that raisedSenators Grassley and Baucus to introduce new ways to punish countries – like, er, China – with “misaligned currencies."

Any steps which don't threaten greater protectionism are welcome at present. Trade is being used, predictably, as a mixture of punching bag and hollywood villain in various House races. At the same time the value of the dollar relative to other countries also helps to increase calls for protectionism. C. Fred Bergsten, Director of the Institute for International Economics, made this point in a recent article:

The history of U.S. trade policy amply demonstrates that dollar overvaluation, and the huge and growing trade deficits that it spawns, are by far the most accurate predictors of U.S. protectionism. When currency misalignments provide sizable advantages to their competitors, more industries look for relief from imports. When their goods and services are priced out of global markets, meanwhile, fewer exporters are credibly able, or even willing, to fight for liberalization.

Still, good news amidst storms is better than no good news at all. So congratulations to the two Senators for taking the better path, and let us hope they will continue to try and find more constructive means to solve this vexing issue.