Robert J.

Samuelson - The makings of a trade war with China 10-09-27 4:11 PM

The makings of a trade war with

China
By Robert J. Samuelson
Monday, September 27, 2010; A15

No one familiar with the Smoot-Hawley tariff of 1930

should relish the prospect of a trade war with China -- but
that seems to be where we're headed and probably should
be where we are headed. Although the Smoot-Hawley
tariff did not cause the Great Depression, it contributed to
its severity by provoking widespread retaliation.
Confronting China's export subsidies risks a similar tit-for-
tat cycle at a time when the global economic recovery is
weak. This is a risk, unfortunately, we need to take.

In a decade, China has gone from a huge, poor nation to an economic colossus. Although its per capita
income ($6,600 in 2009) is only one-seventh that of the United States ($46,400), the sheer size of its
economy gives it a growing global influence. China passed Japan this year as the second-largest national
economy. In 2009, it displaced Germany as the biggest exporter and also became the world's largest energy
user.

The trouble is that China has never genuinely accepted the basic rules governing the world economy. China
follows those rules when they suit its interests and rejects, modifies or ignores them when they don't. Every
nation, including the United States, would like to do the same, and most have tried. What's different is that
most other countries support the legitimacy of the rules -- often requiring the sacrifice of immediate
economic self-interest -- and none is as big as China. Their departures from norms don't threaten the entire
system.

China's worst abuse involves its undervalued currency and its promotion of export-led economic growth.
The United States isn't the only victim. China's underpricing of exports and overpricing of imports hurt most
trading nations, from Brazil to India. From 2006 to 2010, China's share of world exports jumped from 7 to
10 percent.

One remedy would be for China to revalue its currency, reducing the competitiveness of its exports.
American presidents have urged this for years. The Chinese acknowledge that they need stronger domestic
spending but seem willing to let the renminbi (RMB) appreciate only if it doesn't really hurt their exports.
Thus, the appreciation of about 20 percent permitted from mid-2005 to mid-2008 was largely offset by
higher productivity (a.k.a. more efficiency) that lowered costs. China halted even this when the global
economy crashed and has only recently permitted the currency to rise. In practice, however, the renminbi
has barely budged.

How much China's currency is undervalued and how many U.S. jobs have been lost are unclear. The
Peterson Institute for International Economics, a research group, says a revaluation of 20 percent would

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Robert J. Samuelson - The makings of a trade war with China 10-09-27 4:11 PM

create 300,000 to 700,000 U.S. jobs over two to three years. Economist Robert Scott of the liberal Economic
Policy Institute estimates that trade with China has cost 3.5 million jobs. This may be high, because it
assumes that imports from China displace U.S. production when many may displace imports from other
countries. But all estimates are large, though well short of the recession's total employment decline of 8.4
million.

If China won't revalue, the alternative is retaliation. This might start a trade war, because China might
respond in kind, perhaps buying fewer Boeings and more Airbuses and substituting Brazilian soybeans for
American. One proposal by Reps. Tim Ryan (D-Ohio) and Tim Murphy (R-Pa.) would classify currency
manipulation -- which China clearly practices -- as an export subsidy eligible for "countervailing duties"
(tariffs offsetting the subsidy). This makes economic sense but might be ruled illegal by the World Trade
Organization. A House committee approved this approach last week; the full House could pass it this week.
Ideally, congressional action would persuade China to negotiate a significant currency revaluation.

Less ideal and more realistic would be a replay of Smoot-Hawley, just when the wobbly world economy
doesn't need a fight between its two largest members. Economic nationalism, once unleashed here and there,
might prove hard to control. But there's a big difference between then and now. Smoot-Hawley was
blatantly protectionist. Dozens of tariffs increased; many countries retaliated. By contrast, American action
today would aim at curbing Chinese protectionism.

The post-World War II trading system was built on the principle of mutual advantage, and that principle --
though often compromised -- has endured. China wants a trading system subordinated to its needs: ample
export markets to support the jobs necessary to keep the Communist Party in power; captive sources for oil,
foodstuffs and other essential raw materials; and technological superiority. Other countries win or lose
depending on how well they serve China's interests.

The collision is between two concepts of the world order. As the old order's main architect and guardian, the
United States faces a dreadful choice: resist Chinese ambitions and risk a trade war in which everyone loses;
or do nothing and let China remake the trading system. The first would be dangerous; the second,
potentially disastrous.

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