A Romney victory could heighten China tensions

FX360

WITH the US presidential election looming, the subject of employment and the health of America’s economy has predictably been high on the agenda. With the country’s manufacturing base suffering, there is a swathe of US voters looking for someone to blame for the unsettling situation.

The Republican challenger Mitt Romney has pointed the finger squarely at the weakness of the Chinese currency during his campaign. His rhetoric has even attracted the attention of China’s Foreign Ministry, leading one official to deny claims that Beijing is manipulating its currency. This same official pointed out that Beijing is voluntarily and gradually reforming China’s exchange rate regime. In fact, the Chinese yuan, adjusted for inflation, has increased 11 per cent against the US dollar since June 2010. To some extent, China has begun to let its currency float, against a backdrop of pressure from the US and other world leaders.

If Romney’s eventual goal is to give China the symbolic branding of a “currency manipulator”, then everything is going to plan so far. Americans who were previously uninterested in the subject are certainly familiar with it now. However Romney may end up going further than simply making a symbolic gesture. He indicated that, as President, he would be able to enact tariffs whenever he believed that a country was unfairly taking advantage of US manufacturers.

This is tantamount to threatening a trade war with China. Knowing the checkered history and unintended consequences of trade wars in the past, is it really a good idea to start one with America’s second largest trade partner? The issue is that the wheels have already been set in motion – earlier this month, the US Senate passed a bill that would levy tariffs on nations with undervalued currencies. This has seized the attention of China.

In response to the passage of the bill through the upper house, China’s vice foreign minister Cui Tiankai said that “should the proposed legislation be made into law, the result would be a trade war and that would be a lose-lose situation for both sides.” What’s more, House speaker John Boehner added: “I think it’s pretty dangerous to be moving legislation through the United States Congress that would force another country to deal with the value of its currency.”

However, it’s worth bearing in mind that, for the bill to become law, it needs to pass through both the Senate and the House of Representatives. The President himself also retains an ultimate right of veto. But if we do see a victory for Romney next month, the likely route is already well mapped out.

Fortunately we’re past the days when nations fired cannons at each other to settle trade wars. Trade disputes are now resolved in much more civil terms at the World Trade Organisation. Often this can see both sides of the dispute saving face by coming to a mutual agreement, thus allowing each country to claim victory. In light of this, it’s difficult to think Romney’s plans are entirely without merit. They at least take this long-running debate to the next level. After all, a dispute can never be resolved until it becomes an issue. Nevertheless, voters should never forget the fluid and interconnected nature of a globalised economy.

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