US ‘uses China as scapegoat’ with currency bill
Introducing extra tariffs in retaliation to China’s nominal exchange rate will not solve the American trade deficit, claim analysts.
The US Senate has voted to discuss a bill to impose duties on Chinese goods imported into the US.
If passed, the bill will allow American companies to impose additional tariffs on goods imported from China, whose currency the US considers to be valued at an artificially low level against the dollar.
But analysts claim the US will not be able to solve the trade deficit by introducing additional tariffs on Chinese goods.
American politicians argue that the yuan is undervalued against the dollar and, as a result, Chinese goods are relatively cheap. This has increased imports of Chinese products to the US, while exporting US products to China is lower due to expense. As a result, there is a large trade deficit between the two countries.
So far this year, America’s trade deficit with China is more than $160 billion.
However, the extent to which the fixed exchange rate affects American trade deficit is questionable.
“In terms of what determines China’s trade [with the US], the exchange rate [between the yuan and the dollar] doesn’t matter very much,” says Barry Bosworth, senior fellow of economic studies at the Brookings Institution. “China has a large number of other subsidies and regulations that influence its trade. Looking at the exchange rate is not a good measure for assessing trade.”
Indeed, the introduction of the bill is unlikely to solve the American trade deficit.
“China has had a large trade surplus and the US has had a trade deficit for years,” says Bosworth. “The US trade deficit... was not a concern for the Americans when unemployment rates were low. Now that there has been an increase in unemployment and little has been done to resolve this problem, the US has turned towards China and blamed high unemployment rates on the Chinese trade surplus.”
This problem has come to the forefront of American politics during election time.
“Discussion surrounding the currency bill relates to America’s upcoming election,” says Stephen Lewis, chief analyst at Monument Securities. “America is effectively using China as a scapegoat for domestic issues that the country is unable to overcome, specifically America’s inability to deal with problems of unemployment.”
Traditionally, there is a tendency to blame foreigners during times of domestic difficulty.
“There seems to be a real sense of déjà vu at the moment,” states Bosworth. “In the 1990s, the US used Japan in the same way as a scapegoat for its own problems. Political leaders are using China as an excuse for high rates of unemployment that they are unable to solve.”
Currently, it is difficult to ascribe domestic problems such as unemployment to the devaluation of the yuan. The rate of inflation of the yuan has accelerated in real terms and the currency has been appreciating against the dollar. Since 2005, the yuan has appreciated against the dollar by more than 25%. At the same time, the US unemployment rate has risen from 7% to about 9%.
Regardless, analysts agree that there is little chance that the bill will come into force.
“The measure will not pass,” says Bosworth. “If it did, the president would veto the measure.”
Other analysts agree.
“Although the Senate is considering the legislation, this is by no means a guarantee that this will actually pass,” says Lewis.
Discussions of this type are expected during times of domestic political pressure. Bosworth adds: “There is nothing wrong with the rhetoric of an anti-China currency bill, but putting these words into action should not happen.”