Tuesday, May 24, 2005

US-China trade tensions - A Perfect Storm?

Irwing Stelzer has a interesting piece in the Weekly Standard today. He relates that a top Washington lobbyist is telling him that conditions resembling 'A Perfect Storm' could trigger a messy trade war with China.

Republican conservatives can in most circumstances be counted on to back free trade. After all, a belief in free markets is bedrock conservative doctrine. But these conservatives are less enthusiastic about free trade than they are worried about the threat that China poses to American interests in Asia. As they see it, that threat is magnified by the European Union's decision to end the embargo on sales of arms to China imposed after the Tiananmen Square massacre. Even more important, they regard Taiwan as a key American ally, and bridle at China's threat to attack the island if its government takes further steps down the road to independence. So don't look to these traditional free traders to oppose protectionist measures.

Then there is the business community. With the exception of some industries that have been hurt by imports, big business can generally be counted on to stand with Bush in opposing impediments to free trade. But so pervasive has been the damage done by China's pirating of intellectual property that the entertainment industry (music, videos, films, video games), pharmaceutical companies, software developers, manufacturers of branded luxury goods, and a host of others have been meeting in Washington to urge the president and Congress to issue
a firm warning to China: crack down on pirates or we will build barriers to Chinese goods.

Add the usual testy, protectionist left to this mix creates a very real possibility that this could produce veto-proof legislation limiting Chinese imports.

Nor, a few weeks ago, did it seem likely that Senator Chuck Schumer's bill to impose a 27 percent duty on Chinese goods to offset the undervalued renminbi would pass. But efforts to kill the measure failed on a 67 to 33 vote in the Senate, setting the stage for a final vote in July.
Trade watchers should focus on three dates: the July vote on the Schumer proposal; the September meeting in Washington of the U.S. and Chinese presidents; and the October Treasury report on currency manipulation that could set the stage for retaliation. If the Chinese can't find a way to make concessions without losing face, and Bush can't find a way to hold off the protectionists, the free trade system as we know it just might not survive.

The Chicomms are faced with two unpleasant alternatives: meaningfully revalue the renminbi (5-10%) to appease the West or face chunky tariffs. Revaluing may be a better bet for their economy but doing so under vocal Western pressure may be unpalatable. I do enjoy any discomfiture of the Beijing tyrants but this one could get UGLY.

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