10.03.2011 1

Senate contemplates taking first step to start a trade war with China

UPDATE: The Senate passed a cloture vote which paves the way for final passage of S. 1619, the Currency Exchange Rate Oversight Reform Act, for later this week.

By Adam Bitely — Some Republicans and Democrats in the Senate have found something they can agree on. And that is rattling sabers to start a trade war with China.

S. 1619, the Currency Exchange Rate Oversight Reform Act, is aimed to hit the Senate floor today. The legislation would seek to punish China and other economies that manipulate their currency by placing tariffs on their goods.

While the intended effect will be to punish foreign governments that implement inflationary policies that are designed to reduce the cost of their exports — strange thing to object to since the U.S. government is guilty of doing this as well — the outcome of punishing foreign economies for following the lead of the U.S. will only result in harm for the U.S. economy and U.S. consumers.

The Club for Growth has “key voted” this legislation, urging politicians to vote “no” stating that, “This proposal would make it easier for the government to slap punitive tariffs on ‘nonmarket’ economies – in particular China – if an exporting country’s currency is considered misaligned against the U.S. dollar. This is a disastrous proposal that would increase taxes on American consumers, stall the economic recovery, and spark an ugly trade war that would benefit no one.”

When the tariff is imposed against a foreign economy, the result will be that prices on goods will rise in the nation imposing the tariff. Simply put, if Congress approves this legislation, and the President signs it, the U.S. would be legislating that they will harm their own consumers because China harmed Chinese consumers by devaluing their own currency.

Sounds absurd, right?

For years, the media has been fueling a panic about the rise of China as a global power. This legislation, introduced by Senator Sherrod Brown (D-OH) with the support of Republican co-sponsors like Lindsey Graham (R-SC), Jeff Sessions (R-AL), Susan Collins (R-ME), and Olympia Snowe (R-ME), is being billed as a way to put China on notice with bi-partisan support on Capitol Hill.

Once legislation like this is passed, China will almost certainly respond with similar measures that would further deteriorate the U.S.-China trade relationship. These types of retaliatory measures are the last thing that is needed as the U.S. economy struggles to recover.

Cato Institute’s Daniel Ikenson stated in a recent blog post that the “China currency legislation is a diversion—a shell game.”

Ikenson stated, “After 8 years of threatening punitive action to compel appreciation of the Chinese currency at a pace deemed acceptable by U.S. politicians (a period, by the way, in which the Yuan appreciated by 30 percent against the dollar in nominal terms — and by much more in real terms), lawmakers may just pull the trigger this time. If so, their action should be seen for what it is: a vote of no confidence in themselves as a body capable of producing solutions to the nation’s economic stagnation and monumental budget and debt woes.”

Politicians in Washington have made mistakes like this before. And each time, the result is the same. When a government puts restrictions on trade, consumers pay the price.

For those that believe a trade war with China and those nations that manipulate the value of their currency is the way to fix the economy, remember the wise advice of Frederic Bastiat who said, “When goods do not cross borders, soldiers will.” Legislation like S. 1619 is a sure fire way to slide down a slippery slope that will only result in harm to the U.S. consumer.

Adam Bitely is the Editor-in-Chief of NetRightDaily.com. You can follow him on Twitter at @AdamBitely.

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