How to interpret both sides of the looming US-China trade war

Is China weighing its currency down? Image Source: gulfnews.com
          Is China weighing down its currency?/ Source – gulfnews.com

Beijing and Washington, ever the odd couple, just can’t seem to bring their mismatched, yet inextricably linked, relationship to a calm accord. Without proper mediation, the story of this duo could get kooky real soon.

The US has long debated that China’s currency, the Renminbi, is being artificially undervalued to aid Chinese exports. And up until recently, I had believed that a bunch of podium-positioned finger pointing and top-heavy throat clearing could be the only weapons the US would use against a country which holds vast sums of US debt. But times are tough. Unemployment (not counting those who are unemployed but still looking) is cruising below 10 percent, and with an election not far in the distance, politicians may heed the temptation to stog the fire of demagoguery.

Yesterday, as if speaking directly to China’s Politboro, US Senator Charles Schumer defiantly announced, “The gig is up.” If congress follows this impassioned rhetoric, sanctions and tariffs will follow possibly begetting a trade war by the world’s two largest economies. This should be avoided.

The crux of the matter can be boiled down to a simple question: Is China weighing down its currency?

On one hand, often cited economists such as Paul Krugman are vehement that China’s government is playing a large part in crafting a currency policy that keeps most of the world’s developed countries in a “liquidity trap.” Others point out that year after year of breakneck growth and running a current account surplus should have made the Renminbi rise, which clearly hasn’t happened.

On the other hand, China’s sheer size and the opaqueness of its policies make these claims hard to substantiate. Perhaps China’s indefatigable and gargantuan labor force will continue to keep goods competitively priced. Perhaps the unmeasurable amount of structural changes being unfolded is causing instability. The most formidable defense I’ve heard so far is an attack on the West’s current canoodling of Keynesian policy: quantitative easing. The argument could best be summed up as such: The injection of capital used to bulk up the banks during the financial crisis added so much money to the system that it offset the rise of the Renminbi.

Both bets are possible, but is the rest of the world really ready to place the fate of the global economy on the whim of a bet? I think not. Quick meditation is needed. Laws and institutions need to be set in place to take action if factual evidence is found that a country is manipulating their currency. Anything else should be warded off as political profiteering.

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