China Needs Reprisal Plan Against American Trade Bill

Recently, the U.S. House of Representatives’ Ways and Means Committee drafted a special tax bill to control currency-exchange rates. The bill states that if a foreign currency’s exchange rate is undervalued, the U.S. can lawfully apply countervailing duties against it. Both houses in Congress must approve the bill. If it passes in the House of Representatives and the Senate, and the president signs it, the government can use it to limit exports from countries with undervalued currencies.

It is very clear that most of these rushing politicians believe that diplomatic channels cannot push the yuan to appreciate substantially, which is why they are using legislation to exert pressure. During this early stage, China undoubtedly wants to create a response strategy to this bill quickly. By no means will it sit and wait for the bill to pass before reacting.

This bill is a harsh and unreasonable use of force by dictators. First, it takes despicable protectionism and legalizes it, then pretentiously claims that the bill is reasonable in the name of “protecting American interests.” In actuality, forcing foreign currencies to appreciate in value means letting your own currency depreciate so that it will become more competitive.

In the 1930s during the Great Depression, many countries used protective tariffs and competitive depreciation to seek benefits at the expense of others. As a result, international trade and individual countries’ economies both suffered setbacks. To gain short-term political benefits, American politicians have forgotten the lessons of the past and given up their own country’s long-term benefits.

Second, this bill gives America full power to evaluate each country’s currency, letting America decide whether a currency is undervalued. This is stark use of America’s hegemonic power to control finances. Since related questions have become highly politicized, the bill can become a political weapon for regional political struggles. If America claims that the currency of a hostile country is undervalued, it can force the currency to appreciate, obstructing that country’s exports and hindering its economic growth.

In truth, it is hard to decide whether a currency is undervalued or overvalued. So-called market-determined exchange rates and market-driven exchange rate reform are lofty ideas that are difficult to realize. Their realization involves many technical criteria and problems, including: (1) Exchange rates are not solely influenced by current accounts. Americans want the yuan to appreciate in order to improve the balance of trade between China and America; however, the flow of capital will also affect the exchange rate. (2) The balance of trade is not solely controlled by the exchange rate. Actually, its influence is minor compared to other factors.

As a Chinese official said, the trade imbalance between China and America is a structural phenomenon, mostly caused by the division of labor. In the past few years, the yuan has appreciated against the dollar about two times, but the trade imbalance between America and China did not shrink — it grew. This proves that appreciating the yuan this time around will not cure anything. (3) When it comes to fixed exchange-rate mechanisms, it is best to regulate the market by addressing domestic labor instead of altering the exchange rate. In terms of prices for product and capital markets, Hong Kong is a good example.

In short, since it is difficult to adhere to exchange-rate rules, America wants a lot of leeway to make decisions arbitrarily. In the past, America has twice requested that the yuan appreciate, and after China appreciated the yuan twice, according to its wishes, America said it was not enough, that the yuan needed to appreciate again, and to a greater extent. This estimation does not have any scientific basis and is politically motivated.

For this reason, China needs to fight back as soon as possible, as well as prepare and announce countermeasures that can act as deterrents. This will force American politicians to recognize China’s power and retreat to avoid a trade war. If China waits until the bill passes to file a complaint with the World Trade Organization, the damage will have already been done.

One should not assume that the bill is a temporary political stunt for the November elections; if the bill passes, the effect will be long-lasting. Besides, the bill is not aimed solely at China. This bill is a challenge against establishing a fairer, more reasonable international financial system, which totally goes against the historical trend of having several major powers in international society. Therefore, to protect its own national interests and the future of the world, China should fight back with all its strength.

There are many possible solutions to this problem, one of which includes responding immediately and not dodging the issue. The National People’s Congress is drawing up a rough countermeasure. That way, if America passes the bill and uses it against China, it can retaliate with redoubled strength.

Another solution, as one mainland Chinese writer suggested, would be to retaliate selectively against the states whose congressmen are pushing hard for the bill to pass. In this way, China could start a trade war with those in America and the European Union who enact the law.

In conclusion, powerful countries should be prepared to fight for justice and use their preparation to deter war. As China rises, irrational attacks are inevitable, and it must respond. This time, it will be difficult to pass a perfunctory exchange-rate adjustment as in the past. Ultimately, China needs to stand up to this challenge.