Currency bill: battle between China and US rumbles on

12th October 2011

This is in spite of warnings from China that the bill could accelerate global economic weakness by prompting tit-for-tat protectionist measures. The bill is another part of the battle for economic supremacy between China and the US and its machinations are keeping observers in thrall. 

The details of the bill are here. It seeks to impose tariffs on imports that are deemed to have been unfairly subsidised by the exporting state. As such it would put pressure on countries that the US deems to be deliberately keeping their currency low.

The main offender is, of course, China. When Gideon Rachman said in his column for the Financial Times that the defining geopolitical drama of the next century would be the battle for power and influence between China and America it caused a storm in the online financial community. He suggested that countries such as Japan, India, Australia and South Korea would be forced to choose between their key trading partner – China – and their key military alliance – the US.

The debate centres around who is the real imperialist: China or the US. stopracism said: "I am sick of the fact that people are trying to blame China for everything, China did not cause the US economic problems, if US didn't overspend on military for so many years it would have the industry to keep American employed. The fact that China is where it is today is because Deng intentionally underspend on military leading half the military industry collapsing in China. This reality was rarely mentioned.

While we in the rest of Asia would like balance of power, we do not see China as an enemy anymore then we see US as an enemy. US should be careful not to be the one who overplays its hand thinking Asian is interested in living under US domination anymore than under China."

Certainly there is evidence that, increasingly, politicians and business leaders may have to choose their side. China has been robust in its criticism of the US move comparing it to the Smoot-Hawlet Tariff Act of 1930, which is widely considered to have accelerated the great depression by triggering a global trade war of protectionist tit-for-tat measures. Certainly it is not the first of its kind.

And it is certainly not universally welcomed. In this piece international stock trader Alan Valdes says: "That's the stupidest thing, to have a trade war with China, to put tariffs on, it didn't work in the thirties, it's not going to work now. That always backfires, you can't do that. You got to have free trade. Once you start putting on tariffs, they will start putting on tariffs on our goods. So it has this domino effect around the world. It's a bad move, it's something that will not work. At the end of the day, it's the consumer that's going to pay because China will raise the prices on their goods, it's just one vicious circle."

The bill still has to get through the House of Representatives, which many consider unlikely. Even if it does pass into law, it may be vetoed as protectionist by the World Trade Organisation. However, a watered-down version may still be passed and shows the thinking of US policymakers.

It may be political posturing, but there is serious intent behind the US moves. It is trying to hang onto its economic supremacy. In doing so, it appears to be letting go of some of its free trade ideals and is, perhaps, showing its vulnerability.

More from Mindful Money:

How soon before China becomes the world's largest economy?

Is a currency war about to erupt?

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