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A Senate bill that aims to restore American jobs by punishing China for its undervalued currency may resonate with a frustrated American public, but it won't work.
In fact, instead creating jobs, the bill is more likely to trigger a damaging trade war with China and increase retail prices for Americans – further hurting the consumer spending that has already been undermined by high unemployment.
"This move is idiotic on so many fronts, I don't know whether to laugh or cry," said Money Morning Chief Investment Strategist Keith Fitz-Gerald.
The Chinese have already threatened to retaliate, and Fitz-Gerald says there are three other reasons why China currency the bill will backfire:
- Tariffs on Chinese goods will raise prices for consumers in the United States, particularly at such retailers as Wal-Mart Stores Inc. (NYSE: WMT) and Target Corp. (NYSE: TGT).
- China holds $3.2 trillion in foreign reserves, much of it in U.S. securities, while U.S. national debt is over $14.7 trillion.
- And China's exports to the United States account for only 4.8% of the country's gross domestic product (GDP).
"The U.S. Senate has decided to put partisan showboating on the back burner just long enough to craft a bipartisan showboating bill," said Money Morning Chief Investment Strategist Keith Fitz-Gerald.
Five Republican senators joined 14 Democrats in co-sponsoring the China currency bill.
Of course, it's easy to see why shortsighted Senators like the China currency bill, which would impose a tariff on imports from countries that fail to address their undervalued currency.
The United States and other countries have long complained that China keeps the yuan undervalued to make its exports cheaper. The $273 billion of U.S. debt China racked up is clear evidence that the country isn't exactly playing fair.
Furthermore, supporters of the legislation say it would bring home between 500,000 and 2.25 million job, boost U.S. exports, and reduce the federal budget deficit by $850 billion over 10 years. And unlike the stimulus packages of the past several years, it would cost the U.S. Treasury nothing.
But these proponents of the legislation are also guilty of overlooking some fairly important points. The most obvious is that over the past three years the U.S. Federal Reserve has seriously weakened the dollar through its loose monetary policy. And as our largest creditor, China has absorbed the brunt of that devaluation.
And even if the United States did have principle on its side – which it doesn't – China has made it clear that it will not be bullied by the West into adjusting its monetary policies.
Shortly after the Senate voted 79-19 on Monday to bring the currency bill to the floor for debate, three Chinese government agencies denounced it.
The Chinese central bank said passage of the measure "may seriously affect the entire progress of China's reform of its yuan exchange rate regime and also lead to a trade war, which we would not like to see."
Indeed, a trade war is something the global economy, much less the U.S. economy can hardly afford at this time. And by pursuing one, the United States risks undoing all of the progress it's made up to this point.
After all, the Chinese yuan has gained 30% on the U.S. dollar since 2005. So China is allowing its currency to appreciate – it's just doing so on its own terms.
Thankfully, the Senate bill is nowhere near law, and many representatives have already expressed reservations about its implementation.
"I'm concerned about the Chinese currency situation," House Speaker John Boehner, R-OH, told reporters at the Capitol on Tuesday. "But I think it's pretty dangerous to be moving legislation through the United States Congress forcing someone to deal with the value of their currency."
The Obama administration has also voiced caution, noting that the sort of retaliatory action prescribed in the Senate bill requires the consent of such international groups as the World Trade Organization (WTO).
So for the time being at least we can chalk all of this anti-China talk up to political grandstanding.
And if you'd like even more insight into China and other growing Asian economies, you should sign up for Keith Fitz-Gerald's New China Trader newsletter. To subscribe, click here. There you'll find all of the Chief Investment Strategist's latest stock picks and advice.
News and Related Story Links:
- Money Morning:
China's Move Away from the U.S. Dollar Means You Need to Invest in the Yuan - Money Morning:
What's In a Name: Can the U.S. Afford to Call China a Currency Manipulator? - Money Morning:
Progress Made on U.S.-China Trade, but Currency Roadblock Remains - Money Morning:
Are the U.S. and China Headed for an All-Out Trade War? - Money Morning:
The Case for the Yuan: Why China's Currency Isn't the Problem Policymakers Make it Out to Be - The Hill:
Boehner: Senate's China currency bill a 'dangerous' move - Politico:
Senate clears way for China currency bill debate - Washington Post:
Congress taking aim at China over currency valuation - Associated Press:
China says US currency bill would have serious repercussions if it becomes law - The Financial Times:
China warns of 'trade war' over US bill
This bill is quite comical and is merely a smoke screen in that the so called Free Trade Treaties are the real reasons for loss of jobs. In view of QE 1, 2 , dollar swaps, and QEs or by any other name. , have had a direct impact on the devaluation of the dollar. On the US Dollar Currency Index in Nov of 2010 the dollar was at 91.57 and dropped to May of 2011 to 72.95 a drop of 20.3%. No matter how one tries to spin this it is a lost in value. There is plenty of blame to go around they have been devaluing since 2002 when in Jan. of that year the dollar was at 120.4 and since that time it has lost 38% of the value. Devaluation of the dollar leads to higher inflation, although they seem to hide it, higher prices, low investment and fewer jobs. Spin it any way you want these are the real figures from the US Dollar Currency Index. I will be attacked that I am against Free trade…I am not ..but actually read one of the Free Trade Agreements and one will realizes that it has nothing to do with Free Trade.
"After all, the Chinese yuan has gained 30% on the U.S. dollar since 2005. So China is allowing its currency to appreciate – it's just doing so on its own terms."…the Fed. US Treasury have been doing a great job of manipulation and devaluation of the dollar.
Sorry ,,I meant to say… On the US Dollar Currency Index in Nov of 2005
You mean you don't need a 1,600 page document to allow "free" trade? I heard dat.
Like so many bills, the title of the legislation was misleading for propaganda purposes. Imagine that.
Can we afford to have a trade war with China and take the risk of China pulling out their huge debt from us?
Can you please publish the names of the Senators who voted for this bone-head idea? We certainly don't to reelect them!!!
Trade war with China means there will be another "Great Depression", but it will be worse. That will lead to another world war 2, but but it will be worse.
Americans seem to be doing everything they can to ruin the world. Everything they do turns into a big mess that the rest of the world has to clean up.
The sooner the USA loses it's super-power status and world currency status, the better.
Firstly, there is already a trade war going and only one side is fighting – China. One cannot allow a massive trade deficit year after year.
Secondly, a trade war will not cause a Great Depression. We are going to get a Great Depression regardless.
It is the suppression of economic volatility (recession suppression) that is driving us off the cliff. Just like a forest that sees each and every fire put out, but will eventually experience a massive collapse due to the build up of dead wood and bushes. We are at the massive collapse point due to the build up of bad decisions, bad economics, corrupt, etc. Had the government allowed small and intermediate recessions to run their course, then these things would have been burned out. Instead, we get a massive collapse, and there is no stopping it.
China is rapidly building up it military. It is taking its profits, building nuclear weapons and pointing them at America. Continuing this process will likely mean that America won't be around much longer.
When an empire comes into conflict with a rising power, then the probability of war is 6 out of 7. This is based on 500 years of history. And it is almost certain there will be a conflict.
Good article.
But the reason for this bill is to provide future generations of boobs an explanation for the current depression, and the coming inability to hide the depression.
It's a good thing 5 out of 19 sponsors are Republicans, otherwise the blame-America for Liberal ideas crowd will have to create the narrative out of whole cloth.
If this bill is not enacted into law, the narrative will go "22 Republicans in Congress destroyed the global economy in 2010…" If enacted, the narrative will go "Republicans sparked a trade war with China…"
At no point will the narrative be…"major Democratic party donors received massive bailouts leading to economy instability. The unwinding of the credit bubble created by those donors and their purchased representatives in a corrupt government led to more market manipulations to ensure those responsible faced no consequences for their actions despite the incredible damage done to a complex global economy. Ordinary citizens trapped in a system not of their own making were blamed for everything from buying too high, selling too low, and not getting a job when employment levels dipped to historic lows. … Followers of Lord Keynes printed money out the whazzo until every productive citizen who had failed to purchase Democratic special privilege insurance was living under a bridge eating government cheese…."
Anyone wanna bet?