Yuan Blood, You Got It: China Bill Passes 348-79

[Before reading on, I urge you to cue the appropriate song for this momentous occasion, AC/DC's "If You Want Blood (You Got It)".] Well I never thought I'd live to see the day: 2010 has been a most promising year in terms of long-anticipated events coming true. First Japan waded into forex markets to stem yen appreciation after six long years of standing pat. Now, an even bigger act of economic one-upmanship is well underway. As anticipated in previous posts [1, 2], today the US House of Representatives finally mustered sufficient huevos to vote in favour of a China currency bill. And overwhelmingly so, I must add:

The House of Representatives sent a unusually confrontational signal to the Chinese leadership on Wednesday, voting overwhelmingly to give President Obama the authority to impose tariffs on all Chinese imports — more than $300 billion this year — in retaliation for Beijing’s refusal to revalue its currency. The vote was 348 to 79.

The bill is unlikely to become law because the prospects for Senate approval are dim. Nonetheless, the action was intended to hand President Obama additional leverage in what has become a major flashpoint between the world’s two largest economies. While tariffs have been slapped on specific products, from steel to tires, because of evidence of unfair export subsidies, the threat to put sizable tariffs on a country’s entire line exports to the United States is highly unusual — and, some argue, of dubious legality under international trade law. It reflects both election-year politics over jobs and huge frustration over unfulfilled promises by China to allow its currency to rise in value, which would make Chinese goods less competitive in the United States.

The administration has been of two minds about the legislation. It has often used the rising public anger over China’s trade advantage to argue to Chinese leaders that the United States would no longer tolerate deliberate currency manipulation. That was a point Mr. Obama made repeatedly last week in a two-hour-long meeting with Wen Jiabao, China’s prime minister.

But in conversations with Congress, Treasury Secretary Timothy F. Geithner and other officials have warned of the danger of touching off a trade war, in which China blocks American goods in retaliation — a tit-for-tat feud that could hurt both economies.

So the gauntlet has been thrown by at least one part of their bicameral legislature. As the article notes, the Senate is said to be more reluctant to pass its own China bill sponsored by venerable New York Senator Charles Schumer. Ask Judd Gregg, for instance. However, things may change after the November midterm elections since the Senate is not likely to vote on the matter before then. What would hasten this eventuality are if (a) the US heads further into a downward spiral and if (b) more China-bashing lawmakers are elected. Who knows? Perhaps China can be made into a litmus test for patriotism.

In the meantime, here are some questions to ponder sequenced in terms of the growing severity of their implications:

• Is there a Senate majority to push through a version through the upper house?
• If a bill reaches the White House, will Obama sign it into law? The White House has been coy about the matter.
• How enthusiastic will perpetual China bashers Stateside be in petitioning the Department of Commerce?
  
• Will China take the US to the WTO over the legality of this new law?
• What kind of retaliation is up China's sleeve--perhaps dumping some Treasuries?

Again, you can argue that this legislation wouldn't pass muster at the WTO--I certainly don't think it does--but the point is to consider what good it may do to global economic imbalances. In essence, both China and the US have given lip service to reducing these imbalances that arguably hastened the arrival of a global economic crisis but do nothing about it. So, to break the suboptimal status quo (a "low-level equilibrium trap" in econogeek speak), what's so bad about a nice trade war to shake matters up? I think this misguided legislation will do the US more harm than good, but hey, I guess there's no real way to find out other to do the deed.

So it's game on. US and China, cut the crap and get down to business. Congress has already done its part to get the ball rolling.

I will keep updating this post as reactions come in, especially from our favourite Chinese state media outlets. WaPo has a pretty good roundup, too.

UPDATE 1: PRC response has been muted since they probably saw this one coming and the Chinese have few plans for making big gestures to appease the Yanks:

China on Thursday warned that a U.S. House of Represenatives bill to penalise it for not letting the yuan rise faster could seriously affect bilateral ties. Foreign ministry spokeswoman Jing Yu told a regular news briefing that Congress should avoid steps that could harm relations, saying Beijing was "resolutely opposed" the the bill. But she declined to say whether China would retaliate...

In response, the official Xinhua news agency quoted China's commerce ministry spokesman, Yao Jian, as saying: "Starting a countervailing investigation in the name of exchange rates does not conform with relevant WTO rules."