The House didn’t manage to pass a budget or head off any of those major tax increases heading our way, but they were able to find the votes for a bill that would allow the administration to aggressively tax Chinese imports. The bill is DOA in the Senate, but the appetite for such a bill among so many lawmakers of both parties is troubling. Treasury Secretary Timothy Geithner has been a voice of reason on the China issue, if nothing else, so the fact that he is rumored to be departing after the election is not a good sign. As for the composition of Congress, which is likely to change: Has anybody taken the trade temperature of the tea partiers? I’m a little concerned about this.
Here’s why: The primary complaint against China is that it is keeping its currency artificially undervalued in order to make its exports more competitive, and that cheap Chinese imports are putting Americans out of work. Put aside the merits of this complaint — it’s my view that the impact of imports on unemployment in the U.S. is vastly overblown — and focus on this: The mechanism China is using to keep its currency allegedly undervalued is purchases of U.S. dollar-denominated assets. Put more simply, the Chinese buy a lot of U.S. debt. This pushes up the value of the dollar, pushes interest rates down, and keeps the Chinese yuan worth less than many experts and industry special-pleaders alike say it should be worth.
So here’s what happens if we start a trade war with China: It’s not just the tariff on imports, which would make the goods we buy from China more expensive. It’s the incredibly dangerous game of chicken we would be playing with the Chinese if we decided to go down this road. Letting the yuan appreciate would probably entail China slowing its purchases of U.S. debt, pushing interest rates up, and putting downward pressure on the dollar, which is already taking a beating as investors brace themselves for Ben Bernanke’s next round of money-printing. Not that I’m terribly optimistic about our chances for ending the mega-debt-binge we’ve been on with a soft landing, but if you want to have a fiscal crisis for sure, right now, starting a trade war with China would be a good way to bring one about.