Singapore - Keep away from trade wars

There is little doubt that an undervalued yuan contributes to job losses in the United States. There is also little doubt that the Chinese authorities are aware of the problem. Since June last year, the yuan has increased in value by 7 per cent against the dollar; indeed, it has appreciated by about 30 per cent since March 2005.

 However, the US-China trade deficit grew in the latter period and stood at US$273 billion last year. The US unemployment rate, which is what hurts the man in the street, stood at 9.1 per cent in August this year.

Hence, it is understandable that US legislators should want to act decisively on joblessness. It is their responsibility to do so. However, some American lawmakers appear to have become unrealistically zealous in wanting to hold the undervalued yuan responsible for America's domestic economic problems. China has been made a target of a Bill that seeks to stop its currency manipulation with threats of retaliatory tariffs on its exports. Separately, there are voices suggesting that a 20 per cent rise in the yuan would bring down the US current account deficit by US$50 billion (S$65 billion) to US$100 billion, while a 40 per cent rise would mean a US$200 billion reduction. What is not factored into this kind of wishful thinking is the effect that such drastic moves would have on the Chinese economy. House Speaker John Boehner had his finger on the pulse of reality when he said: "It's a pretty dangerous thing to be moving legislation through the US Congress forcing someone to deal with the value of a currency."

What is dangerous is that China might respond to the punitive measures being proposed in the Bill with retaliatory measures of its own. The consequences could mean the start of a trade war between the US and China. This is what Beijing has warned Washington against. Some American policymakers believe that the Chinese could be bluffing - but what if they are not? Here, again, lies the danger of brinkmanship.

Such a game is dangerous between any two countries, but it could be disastrous if played out between what have been called the G-2 countries. That term recognises the special relationship that ought to exist between the world's two most powerful countries. Given that the crux of that relationship would consist of Washington and Beijing working together to find solutions to global problems, it would be ironical, to say the least, if the rest of the world had to pick up the pieces following a fallout between the two.

News Desk

The Straits Times

Business & Investment Opportunities
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