How to Deal with the Big Stick of U.S. Trade Sanctions

U.S. Congressmen should revisit the history of the Great Depression. They should review the protectionist tariffs that their preceding generation enacted for the sake of self-interest, which resulted in a bitter lesson that harmed all and benefited none.

On September 24th, the U.S. House of Representatives Ways and Means Committee passed a bill with the so-called purpose of “imposing a special tariff on countries with undervalued currency.” Analysts point out that if Congress passes the bill, a trade war could erupt between China and the United States. However, at the moment, this bill only waves the big stick of sanctions and does not necessarily mean that the U.S. is ready to punish China.

The House of Representatives will vote on the bill next week. Should it be successful, it will then move to the Senate for a vote. Analysts say it is possible the bill will be passed in the House, yet blocked in the Senate, nipping the bill in the bud.

No matter the result, we have to recognize that there is a significant amount of political pressure in the U.S. that will never give up pressuring China on its currency.

In fact, since China implemented currency reform in 2005, the Renminbi has risen over 20 percent in value. Furthermore, from July 2008 to February 2009, when the global economy was facing extreme difficulty, the real effective exchange rate of the Renminbi appreciated 14.5 percent.

Will a substantial appreciation of the Renminbi bring Americans a significant number of job opportunities? Some American scholars believe that “this kind of thinking is stupid.”* Additionally, many former secretaries of the Department of Commerce united with trade representatives to send a letter to both parties in Congress, warning that if the United States imposed a special tariff on “countries with undervalued currency,” it could provoke retaliations, affecting U.S. exports.

The U.S.’ hope that depreciating the Renminbi will bring a large decrease in the U.S. trade deficit may be hard to realize. In the late 1980s, the United States forced the Japanese yen to appreciate significantly; within three years, the Japanese-American trade surplus slid, but, from 1990 on, it started to increase swiftly.

Perhaps U.S. Congressmen should revisit the history of the Great Depression and review the protectionist tariffs that its preceding generation enacted for the sake of self-interest, which resulted in a bitter lesson that harmed all and benefited none. In 1930, through the Smoot-Hawley Tariff Act, Congress levied significant tariffs on some 20,000 imported goods, instigating a trade war that exacerbated the worldwide economic depression.

The situation today and that of the past have similarities. The difference lies in the fact that the United States is targeting a small number of countries that have an “undervalued currency,” including China, and therein lies the problem: it is targeting China. It is necessary to point out that the United States is targeting an economy that is the world’s second largest in terms of scale. Additionally, said country is already seen as the main engine driving the difficult recovery of the world economy. Therefore, a possible trade conflict will inevitably create shockwaves for the entire world.

As for China, it needs to make the United States understand that waving a big stick has no effect. China will take its own steps to implement currency reform. It will not be directed by the big stick that is America’s trade because currency is a fundamental interest.

First, considering that the proportion of international trade in China’s economy is not small, and that China’s exports are still mostly due to labor-intensive manufactured goods, China’s export industry — perhaps even the entire economy — has a base line Renminbi exchange rate. Going past the base line will leave us with a huge problem.

Secondly, China holds a large amount of U.S. debt. U.S. pressure to appreciate the Renminbi will inevitably cause China’s holdings to be devalued. China would suffer huge losses, while the United State’s responsibility of debt would be correspondingly lightened.

More than 1,000 American economists once sent a joint letter to Congress and the president, asking them to prevent the passage of the Smoot-Hawley Tariff Act. Neither the U.S. Congress nor then-President Hoover accepted the request, the result of which everyone knows. Today, facing international and domestic opposition, we request that the U.S. Congress and the president maintain a clear state of mind to prevent a disastrous policy from repeating itself.

*EDITOR’S NOTE: The original quote, accurately translated, could not be verified.