The 27.5 percent solution

A trade war with China inches closer. Oh goody.


Andrew Leonard
March 23, 2006 10:35PM (UTC)

Stephen Roach has an alarming anecdote in his latest indispensable economic update, this time datelined Beijing. He recounts a conversation with Democratic Sen. Chuck Schumer, who, along with Republican Sen. Lindsey Graham, is threatening to impose tariffs of 27.5 percent on all Chinese-made goods if China fails to significantly upwardly revalue its currency.

(By the way, if you're wondering, as I have been, where the number "27.5" came from, here's the deal. American economist estimates of just how much China's currency is undervalued range from 15 to 40 percent. 27.5 is halfway between those two numbers.)

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Anyway, according to Roach, Schumer doesn't think that a trade war will actually break out -- he wants to be remembered by history as "the man who made China blink." And he believes that his strong-arm tactics will solve all kinds of American problems.

Here's Roach's account: "'I care deeply about the loss of U.S. manufacturing jobs to China, [says Schumer]. If I am successful in cutting our trade deficit with the Chinese, not only will those jobs come back home but I will have succeeded in boosting U.S. saving and cutting excess consumption. My bill can do all that and more.' I am rarely speechless, but at that point, I started to choke on a huge bite of watermelon. 'Let me get this straight,' I gasped, 'tariffs will boost saving?' Too late -- he was already off to face the ever-present battery of cameras and microphones."

The truth is probably the opposite. Even if China does blink and significantly boosts its currency upward, the chief immediate result of that will be to raise prices for a huge range of imported goods, which will put even more stress on the American pocketbook, and probably further depress the savings rate.

There's also a good question as to whether more expensive Chinese products really will boost manufacturing in the U.S. or whether it will just encourage the relocation of production to other countries. The Financial Times reported yesterday that a Hong Kong sourcing firm said rising costs in China have already diverted textile production to other, cheaper nations, such as Bangladesh. If the U.S. wants to boost manufacturing via protectionism, politicians would likely have to extend tariffs to great chunks of the rest of the world. That will no doubt be loads of fun for everyone.

Matters are coming to a head. A currency report from the U.S. Treasury is due any week now. A vote in Congress on the Schumer-Graham bill is scheduled for March 31. One way or another, there will be some kind of resolution to the current impasse, and it's sure going to be interesting to see how it plays out. But the scary thing, if you read Roach's account of his conversations with Chinese leaders, is that the Chinese seem to have a very clear view of the challenges their country faces, and the structural changes they need to make to sustain steady growth. It's very hard to have the same kind of confidence in U.S. politicians.


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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